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EX-32 - EXHIBIT 32 CERTIFICATION BY CEO AND CFO - Spark Energy, Inc.certceoandcfoexh32-q32015.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION BY CEO - Spark Energy, Inc.certceoexh311-q32015.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION BY CFO - Spark Energy, Inc.certcfoexh312-q32015.htm
EX-10.5 - EXHIBIT 10.5 SEPARATION AND RELEASE AGREEMENT A WALL - Spark Energy, Inc.ex105sepandrelagreeawall.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 September 30, 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.)
12140 Wickchester Ln, Suite 100
Houston, Texas 77079

(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 November 10, 2015.




PART I. FINANCIAL INFORMATION
 
 
ITEM 1. FINANCIAL STATEMENTS
 
 
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2015 AND DECEMBER 31, 2014 (unaudited)
 
 
 
 
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014 (unaudited)
 
 
 
 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 (unaudited)

 
 
 
 
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2015 AND DECEMBER 31, 2014
(in thousands)
(unaudited)
 
September 30, 2015
 
December 31, 2014
Assets

 

Current assets:

 

Cash and cash equivalents
$
7,355


$
4,359

Restricted cash


707

Accounts receivable, net of allowance for doubtful accounts of $3.0 million and $8.0 million as of September 30, 2015 and December 31, 2014
50,284


63,797

Accounts receivable—affiliates
1,447


1,231

Inventory
5,230


8,032

Fair value of derivative assets
129


216

Customer acquisition costs, net
15,260


12,369

Intangible assets—customer acquisitions, net
1,439


486

Acquired customer intangibles, net
5,979



Prepaid assets
420


1,236

Prepaid assets—affiliates
120



Deposits
6,952


10,569

Current deferred tax asset
803



Other current assets
4,503


2,987

Total current assets
99,921

 
105,989

Property and equipment, net
4,422


4,221

Customer acquisition costs
4,618


2,976

Intangible assets—customer acquisitions
1,971


1,015

Acquired customer intangibles
5,979



Trademarks
1,226



Deferred tax assets
23,196


24,047

Goodwill
18,385



Other assets
735


149

Total assets
$
160,453

 
$
138,397

Liabilities and Stockholders' Equity

 

Current liabilities:

 

Accounts payable
$
28,731

 
$
38,210

Accounts payable—affiliates
1,867

 
1,017

Accrued liabilities
10,409

 
7,195

Fair value of derivative liabilities
6,437

 
11,526

Current portion of Senior Credit Facility
31,306


33,000

Other current liabilities
834


1,868

Total current liabilities
79,584

 
92,816

Long-term liabilities:


 


Fair value of derivative liabilities
873

 
478

Payable pursuant to tax receivable agreement—affiliates
20,767


20,767

Long-term portion of Senior Credit Facility
15,919



Non-current deferred tax liability
824



Convertible subordinated notes to affiliate
6,307



Other long-term liabilities
1,605


219

Total liabilities
125,879

 
114,280

Commitments and contingencies (Note 11)





Stockholders' equity:





       Common Stock:





Class A common stock, par value $0.01 per share, 120,000,000 shares authorized, 3,097,193 issued and outstanding at September 30, 2015 and 3,000,000 issued and outstanding at December 31, 2014
31


30

Class B common stock, par value $0.01 per share, 60,000,000 shares authorized, 10,750,000 issued and outstanding at September 30, 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 September 30, 2015 and December 31, 2014



        Additional paid-in capital
11,933


9,296

        Retained deficit
(224
)

(775
)
       Total stockholders' equity
11,848


8,659

Non-controlling interest in Spark HoldCo, LLC
22,726


15,458

       Total equity
34,574


24,117

Total liabilities and stockholders' equity
$
160,453


$
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 AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(in thousands, except per share data)
(unaudited)

Three Months Ended September 30,
Nine Months Ended September 30,

2015

2014
2015 (1)

2014
Revenues:






Retail revenues (including retail revenues—affiliates of $0 for both the three months ended September 30, 2015 and 2014, respectively and retail revenues—affiliates of $0 and $2,170 for the nine months ended September 30, 2015 and 2014, respectively)
$
91,812


$
68,358

$
261,996


$
238,453

Net asset optimization (expenses) revenues (including asset optimization revenues—affiliates of $263 and $3,208 for the three months ended September 30, 2015 and 2014, respectively, and asset optimization revenues—affiliates cost of revenues of $3,382 and $6,450 for the three months ended September 30, 2015 and 2014, respectively and asset optimization revenues—affiliates of $928 and $10,341 for the nine months ended September 30, 2015 and 2014, respectively, and asset optimization revenues—affiliates cost of revenues of $9,589 and $25,004 for the nine months ended September 30, 2015 and 2014, respectively)
(545
)

(141
)
1,317


1,681

Total Revenues
91,267


68,217

263,313


240,134

Operating Expenses:






Retail cost of revenues (including retail cost of revenues—affiliates of $0 and $0.1 million for the three months ended September 30, 2015 and 2014, respectively and retail cost of revenues—affiliates of less than $0.1 million and $0.1 million for the nine months ended September 30, 2015 and 2014, respectively)
60,967


51,863

176,000


192,371

General and administrative (including general and administrative expense—affiliates of $0 and $0.1 million for the three months ended September 30, 2015 and 2014, respectively and general and administrative expense—affiliates of $0 and $0.1 million for the nine months ended September 30, 2015 and 2014, respectively)
15,493


10,634

43,909


28,494

Depreciation and amortization
7,557


4,113

17,873


10,324

Total Operating Expenses
84,017


66,610

237,782


231,189

Operating income
7,250


1,607

25,531


8,945

Other (expense)/income:






Interest expense
(800
)

(615
)
(1,415
)

(1,150
)
Interest and other income
5


40

326


111

Total other expenses
(795
)

(575
)
(1,089
)

(1,039
)
Income before income tax expense
6,455


1,032

24,442


7,906

Income tax expense
580


613

1,599


777

Net income
$
5,875


$
419

$
22,843


$
7,129

Less: Net income (loss) attributable to non-controlling interests
4,561


(642
)
18,959


6,068

Net income attributable to Spark Energy, Inc. stockholders
$
1,314


$
1,061

$
3,884


$
1,061





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






       Basic
$
0.42


$
0.35

$
1.27


$
0.35

       Diluted
$
0.31


$
0.03

$
1.09


$
0.35










Weighted average shares of Class A common stock outstanding








       Basic
3,097


3,000

3,053


3,000

       Diluted
14,232


13,750

13,948


3,000

(1)    Financial information has been recast to include results attributable to the acquisition of Oasis Power Holdings LLC on May 12, 2015 from an affiliate. See Note 2 “Basis of Presentation” and Note 3 "Acquisitions" for further discussion.

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


3


SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 December 31, 2014
3,000

10,750


$
30

$
108

$
9,296

$
(775
)
$
8,659

$
15,458

$
24,117

Stock based compensation





1,366


1,366


1,366

Restricted stock unit vesting
97



1


353


354


354

Contribution from NuDevco





129


129


129

Consolidated net income (1)






3,884

3,884

18,959

22,843

Beneficial conversion feature





789


789


789

Distributions paid to Class B non-controlling unit holders








(11,691
)
(11,691
)
Dividends paid to Class A common shareholders






(3,333
)
(3,333
)

(3,333
)
Balance at September 30, 2015
3,097

10,750


$
31

$
108

$
11,933

$
(224
)
$
11,848

$
22,726

$
34,574

(1)    Financial information has been recast to include results attributable to the acquisition of Oasis Power Holdings LLC on May 12, 2015 from an affiliate. See Note 2 “Basis of Presentation” and Note 3 "Acquisitions" for further discussion.
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 NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(in thousands)
(unaudited) 
  
Nine Months Ended September 30,
  
2015 (1)

2014
Cash flows from operating activities:



Net income
$
22,843


$
7,129

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



Depreciation and amortization expense
17,873


10,324

Deferred income taxes
872


638

Stock based compensation
1,992


362

Amortization of deferred financing costs
295


580

Bad debt expense
6,082


3,973

Gain (loss) on derivatives, net
6,118


(262
)
Current period cash settlements on derivatives, net
(15,120
)

7,252

Accretion of discount to convertible subordinated notes to affiliate
21



Changes in assets and liabilities:



Decrease in restricted cash
707



Decrease in accounts receivable
18,566


9,741

Decrease (increase) in accounts receivable—affiliates
(216
)

6,310

Decrease (increase) in inventory
2,978


(5,338
)
Increase in customer acquisition costs
(17,725
)

(20,366
)
Decrease (increase) in prepaid and other current assets
11,110


(4,658
)
Increase in intangible assets—customer acquisitions
(2,776
)


Increase in other assets
(256
)

(146
)
Decrease in accounts payable and accrued liabilities
(14,610
)

(5,890
)
Increase in accounts payable—affiliates
849


851

Increase (decrease) in other current liabilities
(1,534
)

1,465

Increase in other non-current liabilities
1,606



Net cash provided by operating activities
39,675


11,965

Cash flows from investing activities:



Purchases of property and equipment
(1,255
)

(2,214
)
Acquisition of CenStar and Oasis net assets
(41,234
)


Investment in eRex joint venture
(330
)


Net cash used in investing activities
(42,819
)

(2,214
)
Cash flows from financing activities:



Borrowings on credit facilities
52,225


60,280

Payments on credit facilities
(38,000
)

(38,280
)
Member contributions (distributions), net


(36,406
)
Contributions from NuDevco
129



        Proceeds from issuance of Class A common stock


50,220

        Distributions of proceeds from Offering to affiliate


(47,554
)
        Payment of Note Payable to NuDevco


(50
)
        Offering costs


(2,667
)
        Issuance of convertible subordinated notes to affiliate
7,075



Restricted stock vesting
(265
)


Payment of dividends to Class A common shareholders
(3,333
)


        Payment of distributions to Class B unitholders
(11,691
)


Net cash provided by (used in) financing activities
6,140


(14,457
)
Increases (decreases) in cash and cash equivalents
2,996


(4,706
)
Cash and cash equivalents—beginning of period
4,359


7,189

Cash and cash equivalents—end of period
$
7,355


$
2,483

Supplemental Disclosure of Cash Flow Information:



Non cash items:
 
 
 
       Property and equipment purchase accrual
$
11


$
81

       CenStar Earnout accrual
$
500

 
$

Cash paid during the period for:
 
 
 
Interest
$
1,061


$
484

Taxes
$
157


$
150

(1)    Financial information has been recast to include results attributable to the acquisition of Oasis Power Holdings LLC on May 12, 2015 from an affiliate. See Note 2 “Basis of Presentation” and Note 3 "Acquisitions" for further discussion.
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. ("we" or 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 or shares in each of Spark Energy, LLC (“SE”), Spark Energy Gas, LLC (“SEG”), Oasis Power Holdings, LLC ("Oasis") and CenStar Energy Corp. ("CenStar"), 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 Electric Holdco, LLC, which is indirectly 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.

Oasis, through its operating subsidiary, Oasis Power LLC, is a retail energy provider with approximately 43,000 customers in six states as of September 30, 2015. Oasis was formed on August 28, 2009 as a limited liability company under the TBOC. We acquired Oasis on July 31, 2015 from an affiliate. Financial information has been

6


recast to include results attributable to the acquisition of Oasis on May 12, 2015, the affiliate's acquisition date. See Note 2 “Basis of Presentation” and Note 3 "Acquisitions" for further discussion.

CenStar is a retail energy provider with approximately 16,000 customers in three states as of September 30, 2015. CenStar was incorporated on July 18, 2008 under the New York Business Corporation Law. We acquired CenStar on July 8, 2015.

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.

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.

The Spark HoldCo Limited Liability Company Agreement provides that anytime the Company issues a new share of Class A or Class B common stock (except for issuances of Class A common stock upon an exchange of Class B common stock), Spark HoldCo will concurrently issue a limited liability company unit either to the holder of the Class B common stock or to the Company in the case of the issuance of shares of Class A common stock.  As a result, the number of Spark HoldCo units held by the Company always equals the number of shares of Class A common stock outstanding.





7


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
%
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, 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.
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"), and include all wholly owned subsidiaries. We account for investments over which we have significant influence but not a controlling financial interest using the equity method of accounting. Refer to further discussion at Note 15 "Equity Method Investment".
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 nine months ended September 30, 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.

Transactions with Affiliates
The Company also enters into transactions with and incurs certain costs on behalf of affiliates that are commonly controlled by W. Keith Maxwell III in order to reduce risk, reduce administrative expense, create economies of

8


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 management due diligence work, recurring management consulting, accounting, tax, legal, or technology services based on services provided, departmental usage, or headcount, which are considered reasonable by management. 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. The allocations and related estimates and assumptions are described more fully in Note 12 “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 5 “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.

Presentation of the Acquisition of Oasis Power Holdings, LLC

On May 12, 2015, Retailco Acquisition Co, LLC ("Retailco"), an affiliate of NuDevco, completed the acquisition of 100% of the membership interests of Oasis. Also, on May 12, 2015, Spark HoldCo entered into a Membership Interest Purchase Agreement (the "Oasis Purchase Agreement") with Retailco for the purchase of all the membership interests of Oasis. Spark HoldCo completed the acquisition of Oasis from Retailco on July 31, 2015. See Note 3 "Acquisitions" for further discussion. Because the acquisition of Oasis was a transfer of equity interests of entities under common control, the Company's historical financial statements previously filed with the SEC have been recast in this Form 10-Q to include the results attributable to Oasis from May 12, 2015. The unaudited condensed consolidated financial statements for this recast period have been prepared from Retailco's historical cost-basis and may not necessarily be indicative of the actual results of operations that would have occurred had the Company owned Oasis during the recast period.

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 16 “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 ("ASU 2014-09"), Revenue from Contracts with Customers (Topic 606), 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. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU

9


No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date to periods beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810), Amendments to the Consolidation Analysis (“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 will adopt ASU 2015-03 on January 1, 2016 and reclassify any unamortized debt issuance costs as a direct deduction from the carrying amount of those associated debt liabilities at that time.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 amends existing guidance to require subsequent measurement of inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company does not expect the adoption of ASU 2015-11 will have a material effect on the combined or consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements ("ASU 2015-15"). The amendment in ASU 2015-15 clarifies the presentation and subsequent measurement of debt issuance costs associated with lines of credit. The debt issuance cost associated with line-of-credit may be presented as an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are outstanding borrowings on the arrangement. ASU 2015-15 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 will adopt ASU 2015-15 on January 1, 2016 in conjunction with ASU 2015-03 and does not expect the adoption of ASU 2015-15 will have a material effect on the combined or consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments ("ASU 2015-16"). ASU 2015-16 eliminates the requirement that the acquirer in a business combination account for measurement period adjustments retrospectively. Instead, the acquirer will recognize adjustments to provisional amounts identified within the measurement period in the reporting period in which those adjustments are determined. ASU 2015-16 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The guidance is to be applied prospectively for adjustments to provisional amounts that occur after the effective date. Early adoption is permitted for financial statements that have not been issued. The Company will adopt ASU 2015-16 on January 1, 2016 and does not expect the adoption of ASU 2015-15 will have a material effect on the combined or consolidated financial statements.



10


3. Acquisitions

Acquisition of CenStar Energy Corp

On July 8, 2015, the Company completed its acquisition of CenStar, a retail energy company based in New York. CenStar serves natural gas and electricity customers in New York, New Jersey, and Ohio. The purchase price for the CenStar acquisition was $8.3 million, plus working capital of $10.4 million and an earnout payment estimated as of the acquisition date to be $0.5 million, which is associated with a financial measurement attributable to the operations of CenStar for the year following the closing ("CenStar Earnout"). See Note 6 "Fair Value Measurements" for further discussion on the CenStar Earnout. The purchase price was financed with $16.6 million (including positive working capital of $10.4 million) under our senior secured revolving credit facility ("Senior Credit Facility") and $2.1 million from the issuance of a convertible subordinated note ("CenStar Note") from the Company and Spark HoldCo to Retailco. See Note 5 "Debt" for further discussion of the Senior Credit Facility and the CenStar Note.

The acquisition of CenStar has been accounted for under the acquisition method in accordance with ASC 805, Business Combinations (“ASC 805”). The allocation of purchase consideration was based upon the estimated fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition. The allocation was made to major categories of assets and liabilities based on management’s best estimates, supported by independent third-party analyses. The excess of the purchase price over the estimated fair value of tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. The allocation of the purchase consideration is as follows (in thousands):

Cash

$
371

Net working capital, net of cash acquired

10,094

Property and equipment

52

Intangible assets - customer relationships

5,044

Intangible assets - trademark

651

Goodwill

6,497

Fair value of derivative liabilities

(3,475
)
Total

$
19,234


The fair values of intangible assets were measured primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined by ASC 820, "Fair Value Measurement" ("ASC 820"). The fair value of derivative liabilities were measured by 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 and represent a Level 2 measurement as defined by ASC 820. Refer to Note 6 "Fair Value Measurements" for further discussion on the fair values hierarchy. Significant inputs for Level 3 measurements were as follows:

Customer relationships. The customer relationships, reflective of CenStar’s customer base, were valued using an excess earnings method under the income approach. Using this method, the Company estimated the future cash flows resulting from the existing customer relationships, considering attrition as well as charges for contributory assets, such as net working capital, fixed assets, and assembled workforce. These future cash flows were then discounted using an appropriate risk-adjusted rate of return by retail unit to arrive at the present value of the expected future cash flows. These customer relationships are amortized to depreciation and amortization based on the expected future net cash flows by year.

Trademark. The fair value of the CenStar trademark is reflective of the value associated with the recognition and positive reputation of CenStar to its target markets. This value would otherwise have to be internally developed through significant time and expense or by paying a third party for its use. The fair value of the trademark was

11


valued using a royalty savings method under the income approach. Under this approach, the Company estimated the present value of expected cash flows resulting from avoiding royalty payments to use a third party trademark. We analyzed market royalty rates charged for licensing trademarks and applied an expected royalty rate to a forecast of estimated revenue, which was then discounted using an appropriate risk adjusted rate of return.

Goodwill. The excess of the purchase consideration over the estimated fair value of the amounts initially assigned to the identifiable assets acquired and liabilities assumed was recorded as goodwill. Goodwill arose on the acquisition of CenStar primarily due to its strong brand and broker affinity relationships, along with access to new utility service territories. Goodwill recorded in connection with the acquisition of CenStar is not deductible for income tax purposes because CenStar was an acquisition of all outstanding equity interests. The final valuation of assets acquired and liabilities assumed is not complete and the net adjustments to those values may result in changes to goodwill and other carrying amounts initially assigned to the assets and liabilities based on the preliminary fair value analysis. The principal remaining item relates to finalization of the valuation of customer relationships and working capital amounts, which are expected to be finalized once the period for post-closing adjustments expires in the fourth quarter of 2015.

The Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2015, respectively, included $10.4 million of revenue and $1.1 million of losses from operations related to the operations of CenStar. The Company incurred $0.1 million of customer acquisition costs for the three and nine months ended September 30, 2015, respectively, in connection with the acquisition of CenStar, which have been expensed as incurred and included in general and administrative expense in the condensed consolidated statement of operations.

Acquisition of Oasis Power Holdings, LLC

On July 31, 2015, the Company completed its acquisition of Oasis, a retail energy company operating in six states across 18 utilities. The purchase price for the Oasis acquisition was $20.0 million, subject to working capital adjustments. The purchase price was financed with $15.0 million in borrowings under our Senior Credit Facility and $5.0 million from the issuance of a convertible subordinated note ("Oasis Note") from the Company and Spark HoldCo to Retailco. See Note 5 "Debt" for further discussion of the Senior Credit Facility and the Oasis Note.

As discussed in Note 2 "Basis of Presentation," the acquisition of Oasis by the Company from Retailco was a transfer of equity interests of entities under common control on July 31, 2015. Accordingly, the assets acquired and liabilities assumed were based on their historical values as of July 31, 2015 as follows (in thousands):

Cash
 
$
271

Net working capital, net of cash acquired
 
2,056

Property and equipment
 
38

Intangible assets - customer relationships
 
7,963

Intangible assets - trademark
 
602

Goodwill
 
11,889

Fair value of derivative liabilities

 
(819
)
Total
 
$
22,000


Goodwill was transferred based on the acquisition of Oasis by Retailco on May 12, 2015 and was primarily due to Oasis's brand strength, established vendor relationships and access to new utility service territories. Goodwill recorded in connection with the transfer of Oasis is deductible for income tax purposes.

The Company’s condensed consolidated statements of operations for three months ended September 30, 2015 included $10.6 million of revenue and $0.5 million of income from operations related to the operations of Oasis.

12


The Company’s condensed consolidated statements of operations for nine months ended September 30, 2015 included $15.4 million of revenue and $0.1 million of loss from operations related to the operations of Oasis.

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

Estimated 
useful
lives

September 30, 2015

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

$
26,938


$
25,588

Leasehold improvements
2 – 5

4,568


4,568

Furniture and fixtures
2 – 5

1,007


998

Total


32,513


31,154

Accumulated depreciation


(28,091
)

(26,933
)
Property and equipment—net


$
4,422


$
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 September 30, 2015 and December 31, 2014, information technology includes $0.7 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 $0.3 million and $0.8 million for the three months ended September 30, 2015 and 2014, respectively, and $1.2 million and $2.7 million for the nine months ended September 30, 2015 and 2014, respectively.
5. Debt
Prior to the Offering - Overview
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”).
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.

13


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.
Prior to the Offering - 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 included the total amounts outstanding under the working capital facility of $27.5 million as December 31, 2013, which was 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. Under the working capital facility, the Company paid a fee with respect to each letter of credit issued and outstanding.
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 2.00% per annum. The Company also paid a commitment fee equal to 0.50% per annum.
Prior to the Offering - 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.


14


Senior Credit Facility Executed at the Offering

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 was set to mature 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 outstanding under the Senior Credit Facility at inception.

On July 8, 2015, the Company as guarantor, and Spark HoldCo (the “Borrower," and together with the subsidiaries of Spark HoldCo, the “Co-Borrowers”) amended and restated the Senior Credit Facility to include a senior secured revolving working capital facility of $60.0 million ("Working Capital Line") and a secured revolving line of credit of $25.0 million ("Acquisition Line") to be used specifically for the financing of up to 75% of the cost of acquisitions with the remainder to be financed by the Company either through cash on hand or the issuance of subordinated debt. The Senior Credit Facility will mature on July 8, 2017 and may be extended for one additional year with lender consent. Borrowings under the Acquisition Line will be repaid 25% per year with the remaining 50% due at maturity. The Company borrowed $16.6 million utilized in the closing of the CenStar acquisition, and on July 31, 2015, the Company borrowed an additional $15.0 million utilized in the closing of the Oasis acquisition. Refer to Note 3 "Acquisitions" for further discussion.

At the Borrower’s election, interest under the Working Capital Line 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); or
- 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 up to 2.5% per annum (based upon the prevailing utilization).
 
The interest rate is generally reduced by 25 basis points if utilization under the Working Capital Line is below fifty percent. Borrowings under the Acquisition Line are generally determined by reference to:
- the Eurodollar rate plus an applicable margin of up to 3.75% per annum (based upon the prevailing utilization); or
- the alternate base rate plus an applicable margin of up to 2.75% 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%.

The Co-Borrowers pay an annual commitment fee of 0.375% or 0.5% on the unused portion of the Working Capital Line depending upon the unused capacity and 0.5% on the unused portion of the Acquisition Line. The lending syndicate under the Senior Credit Facility will be 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 Company has the ability to elect the availability under the Working Capital Line between $30.0 million to $60.0 million. Availability under the working capital line will be subject to borrowing base limitations. The borrowing base 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

15


capital assets. The Co-Borrowers must generally seek approval of the Agent or the lenders for permitted acquisitions to be financed under the Acquisition Line.

The Senior Credit Facility is secured by pledges of the equity of the portion of Spark HoldCo owned by the Company and of the equity of Spark HoldCo’s subsidiaries 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. The Senior Credit Facility also contains covenants that, among other things, require the maintenance of specified ratios or conditions as follows:

Minimum Net Working Capital. The Co-Borrowers must maintain minimum consolidated net working capital at all times equal to $2.0 million initially and gradually increasing to the greater of $5.0 million or 15% of the elected availability under the Working Capital Line.
 
Minimum Adjusted Tangible Net Worth. Spark Energy, Inc. must maintain a minimum consolidated adjusted tangible net worth at all times equal to the net proceeds from equity issuances occurring after the date of the Senior Credit Facility plus the greater of (i) 20% of aggregate commitments under the Working Capital Line plus 33% of borrowings under the Acquisition Line and (ii) $18.0 million.

Minimum Fixed Charge Coverage Ratio. Spark Energy, Inc. must maintain a minimum fixed charge coverage ratio of 1.10 to 1 (with quarterly increases to the numerator of increments of 0.05 beginning in the third quarter of 2016). The Fixed Charge Coverage Ratio is defined as the ratio of (a) Adjusted EBITDA to (b) the sum of consolidated interest expense (other than interest paid-in-kind in respect of any Subordinated Debt), letter of credit fees, commitment fees, acquisition earn-out payments, distributions and scheduled amortization payments.

Maximum Total Leverage Ratio. Spark Energy, Inc. must maintain a ratio of total indebtedness (excluding the Working Capital Facility and qualifying subordinated debt) to Adjusted EBITDA of a maximum of 2.50 to 1. The Senior Credit Facility contains various negative covenants that limit the Company’s 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, investments, acquisitions or loans;
- enter into transactions with affiliates.

Spark Energy, Inc. is entitled to pay cash dividends to the holders of the Class A common stock and Spark HoldCo will be entitled to make cash distributions to NuDevco Retail Holdings, LLC 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 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 the Company from paying dividends to holders of the 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 defaults, cross-defaults and cross-acceleration to certain indebtedness, change in control in which affiliates of W. Keith Maxwell III own less than 40% of the outstanding voting interests in the Company, certain events of bankruptcy, certain events under ERISA, material judgments in excess of $5.0 million, certain events with respect

16


to material contracts, actual or asserted failure of any guaranty or security document supporting the Senior Credit Facility to be in full force and effect and changes of control. If such an event of default occurs, the lenders under the Senior Credit Facility would be entitled to take various actions, including the acceleration of amounts due under the facility and all actions permitted to be taken by a secured creditor.

The Senior Credit Facility is secured by the equity interests of SE, SEG, Spark HoldCo, Oasis and CenStar (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.
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.
Convertible Subordinated Notes to Affiliate

In connection with the financing of the CenStar acquisition, the Company, together with Spark HoldCo, issued the CenStar Note to Retailco for $2.1 million on July 8, 2015. The CenStar Note matures on July 8, 2020, and bears interest at an annual rate of 5%, payable semiannually. The Company has the right to pay interest in kind at its option. The CenStar Note is convertible into shares of the Company’s Class B common stock, par value $0.01 per share (and a related unit of Spark HoldCo) at a conversion price of $16.57 per share. Retailco may not exercise conversion rights for the first eighteen months after the CenStar Note is issued. The CenStar Note is subject to automatic conversion upon a sale of the Company. The CenStar Note is subordinated in certain respects to the Senior Credit Facility pursuant to a subordination agreement. The Company may pay interest and prepay principal so long as the Company is in compliance with its covenants; is not in default under the Senior Credit Facility and has minimum availability of $5.0 million under its borrowing base under the Senior Credit Facility. 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 CenStar 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.

In connection with the financing of the Oasis acquisition, the Company, together with Spark HoldCo, issued the Oasis Note to Retailco for $5.0 million on July 31, 2015. The Oasis Note matures on July 31, 2020, and bears interest at an annual rate of 5%, payable semiannually. The Company has the right to pay-in-kind any interest at its option. The Oasis Note is convertible into shares of the Company's Class B common stock, par value $0.01 per share (and a related unit of Spark HoldCo) at a conversion price of $14.00 per share. Retailco may not exercise conversion rights for the first eighteen months after the Oasis Note is issued. The Oasis Note is subject to automatic conversion upon a sale of the Company. The Oasis Note is subordinated in certain respects to the Senior Credit Facility pursuant to a subordination agreement. The Company may pay interest and prepay principal so long as the Company is in compliance with its covenants; is not in default under the Senior Credit Facility and has minimum availability of $5.0 million under its borrowing base under the Senior Credit Facility. 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 Oasis 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 conversion rate of $14.00 per share for the Oasis Note was fixed as of the date of the execution of the Oasis acquisition agreement on May 12, 2015. Due to a rise in the price of our common stock from May 12, 2015 to the closing of Oasis acquisition on July 31, 2015, the conversion rate of $14.00 per share was below the market price per share of Class A common stock of $16.21 on the issuance date of the Oasis Note on July 31, 2015. As a result, the Company assessed the Oasis Note for a beneficial conversion feature. Due to this conversion feature being "in-the-money" upon issuance, we recognized a beneficial conversion feature based on its intrinsic value of $0.8

17


million as a discount to the Oasis Note and as additional paid-in capital. This discount will be amortized as interest expense under the effective interest method over the life of the Oasis Note.
Balance Sheet and Income Statement Summary
Debt consists of the following amounts as of (in thousands):

September 30, 2015

December 31, 2014
Current portion of Senior Credit Facility
$
31,306


$
33,000

Total current liabilities
31,306


33,000

Long-term portion of Senior Credit Facility
15,919



Convertible subordinated notes to affiliate (1)
6,307



Total long-term liabilities
22,226



Total debt
$
53,532


$
33,000

(1)    Includes unamortized discount of $0.8 million at September 30, 2015 related to a beneficial conversion feature of the Oasis Note.

The Company incurred interest expense related to our Senior Credit Facility and other revolving credit facilities prior to the Offering of $0.4 million and $0.6 million for the three months ended September 30, 2015 and 2014, respectively, and $0.7 million and $1.2 million for the nine months ended September 30, 2015 and 2014, respectively, which is recorded in interest expense in the condensed combined and consolidated statements of operations.

The Company incurred commitment fees totaling less than $0.1 million for the three months ended September 30, 2015 and 2014, respectively, and $0.1 million and less than $0.1 million for the nine months ended September 30, 2015 and 2014, respectively, which is recorded in interest expense in the condensed combined and consolidated statements of operations.

At September 30, 2015, the Company had $20.7 million in letters of credit outstanding. The Company incurred fees on letters of credit issued and outstanding totaling $0.1 million and $0.1 million for the three months ended September 30, 2015 and 2014, respectively, and $0.2 million and $0.3 million for the nine months ended September 30, 2015 and 2014, respectively, which is recorded in interest expense in the condensed combined and consolidated statements of operations.

Deferred financing costs were $0.5 million and $0.3 million as of September 30, 2015 and December 31, 2014, respectively. Of these amounts, $0.5 million and $0.2 million is recorded in other current assets in the condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively, 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 of $0.2 million and $0.4 million for the three months ended September 30, 2015 and 2014, respectively, and $0.3 million and $0.6 million for the nine months ended September 30, 2015 and 2014, respectively, which is recorded in interest expense in the condensed combined and consolidated statements of operations. On July 8, 2015, the Company capitalized $0.8 million in deferred financing costs in conjunction with this amendment and restatement of the Senior Credit Facility and expensed $0.1 million in deferred financing costs previously capitalized related to the prior Senior Credit Facility, which is included in the aforementioned amortization.

The Company incurred total interest expense related to convertible subordinated notes of $0.1 million, including amortization of the discount on the Oasis Note of less than $0.1 million, for both the three and nine months ended September 30, 2015.



18


6. 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 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 and a contingent payment arrangement 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. A contingent payment arrangement related to the CenStar acquisition is categorized as Level 3.
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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
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
September 30, 2015
 

 

 

 
Non-trading commodity derivative assets
$


$
124


$


$
124

Trading commodity derivative assets


5




5

Total commodity derivative assets
$


$
129


$


$
129

Non-trading commodity derivative liabilities
$
(3,617
)

$
(3,649
)

$


$
(7,266
)
Trading commodity derivative liabilities
(34
)

(10
)



(44
)
Total commodity derivative liabilities
$
(3,651
)

$
(3,659
)

$


$
(7,310
)
Contingent payment arrangement
$

 
$

 
$
(500
)
 
$
(500
)

19



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 transfers of assets or liabilities between any of the above levels during the nine months ended September 30, 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 September 30, 2015 and December 31, 2014, the credit risk valuation adjustment was not material.
The contingent payment arrangement referred to above reflects the CenStar Earnout, which is recorded in other current liabilities in the condensed consolidated balance sheet and discussed in Note 3 "Acquisitions." The CenStar Earnout is based on a financial measurement attributable to the operations of CenStar for the year following the closing of the acquisition. In determining the fair value of the CenStar Earnout, the Company forecasted this one year performance measurement, as defined by the CenStar stock purchase agreement. As this performance measurement is based on the Company's internal forecasts, we have classified the CenStar Earnout as a Level 3 measurement. There have been no changes to our estimate of the CenStar Earnout since its initial recognition on July 8, 2015 in connection with the CenStar acquisition.
Other 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 our convertible subordinated notes is not determinable due to the affiliate nature and terms of the associated debt instrument with the affiliate. 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.
7. 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 September 30, 2015 and December 31, 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

20


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 September 30, 2015 and December 31, 2014, the Company had paid zero in collateral. 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;
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. 

In connection with the acquisitions of Oasis and CenStar, the Company novated their existing transactions for the purchase and sale of gas and power over to SE and SEG.

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

September 30, 2015

December 31, 2014
Natural Gas
MMBtu

10,131


9,690

Natural Gas Basis
MMBtu

993


2,710

Electricity
MWh

1,368


607

Trading
Commodity
Notional

September 30, 2015

December 31, 2014
Natural Gas
MMBtu

(160
)

(155
)
Natural Gas Basis
MMBtu

(760
)

(56
)

21


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 September 30,
  
2015

2014
Loss on non-trading derivatives, net (including loss on non-trading derivatives—affiliates, net of $0 and $0 for the three months ended September 30, 2015 and 2014, respectively)
$
132


$
(1,163
)
Gain (loss) on trading derivatives, net (including loss on trading derivatives—affiliates, net of $0 and $0 for the three months ended September 30, 2015 and 2014, respectively)
(71
)

(15
)
Loss on derivatives, net
61


(1,178
)
Current period settlements on non-trading derivatives (1)
4,035


3,039

Current period settlements on trading derivatives (including current period settlements on trading derivatives—affiliates, net of $0 and $0 for the three months ended September 30, 2015 and 2014, respectively)
128


(35
)
Total current period settlements on derivatives
$
4,163


$
3,004

(1)     Excludes settlements of $2.0 million for the three months ended September 30, 2015 related to non-trading derivative liabilities
assumed in the acquisitions of CenStar and Oasis.

Nine Months Ended September 30,
  
2015

2014
Gain (loss) on non-trading derivatives, net
$
(5,876
)

$
5,847

Loss on trading derivatives, net (including loss on trading derivatives—affiliates, net of $0 and $1,792 for the nine months ended September 30, 2015 and 2014, respectively)
(242
)

(5,585
)
Gain (loss) on derivatives, net
(6,118
)

262

Current period settlements on non-trading derivatives (1)
12,643


(9,959
)
Current period settlements on trading derivatives (including current period settlements on trading derivatives—affiliates, net of $0 and $1,693 for the nine months ended September 30, 2015 and 2014, respectively)
244


2,707

Total current period settlements on derivatives
$
12,887


$
(7,252
)
(1)     Excludes settlements of $2.2 million for the nine months ended September 30, 2015 related to non-trading derivative liabilities
assumed in the acquisitions of CenStar and Oasis.
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.





22


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):
  
September 30, 2015
Description
Gross Assets

Gross
Amounts
Offset

Net Assets

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
292


$
(168
)

$
124


$


$
124

Trading commodity derivatives
8


(3
)

5




5

Total Current Derivative Assets
300


(171
)

129




129

Non-trading commodity derivatives









Total Non-current Derivative Assets









Total Derivative Assets
$
300


$
(171
)

$
129


$


$
129


September 30, 2015
Description
Gross 
Liabilities

Gross
Amounts
Offset

Net
Liabilities

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
(12,239
)

$
5,845


$
(6,393
)

$


$
(6,393
)
Trading commodity derivatives
(76
)

32


(44
)



(44
)
Total Current Derivative Liabilities
(12,315
)

5,877


(6,437
)



(6,437
)
Non-trading commodity derivatives
(1,346
)

474


(873
)



(873
)
Total Non-current Derivative Liabilities
(1,346
)
v
474


(873
)



(873
)
Total Derivative Liabilities
$
(13,661
)

$
6,351


$
(7,310
)

$


$
(7,310
)
  
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 Liabilities
(15,186
)

3,660


(11,526
)



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

313


(478
)



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

313


(478
)



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

$
3,973


$
(12,004
)

$


$
(12,004
)




23


8. Equity

Class A Common Stock

The Company has a total of 3,097,193 shares of its Class A common stock outstanding at September 30, 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 September 30, 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 September 30, 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, (2) using the if-converted method to determine the potential dilutive effect of the Company's Class B common stock and (3) using the if-converted method to determine the potential dilutive effect of the outstanding convertible subordinated notes into the Company's Class B common stock.




















24


The following table presents the computation of earnings per share for the three months and nine months ended September 30, 2015 (in thousands, except per share data):

Three Months Ended
 
Nine Months Ended

September 30, 2015
 
September 30, 2015
Net income attributable to shareholders of Class A common stock
$
1,314

 
$
3,884

Basic weighted average Class A common shares outstanding
3,097

 
3,053

Basic EPS attributable to shareholders
$
0.42

 
$
1.27



 

Net income attributable to shareholders of Class A common stock
$
1,314

 
$
3,884

Effect of conversion of Class B common stock to shares of Class A common stock
3,605

 
11,734

Effect of conversion of convertible subordinated notes into shares of Class B common stock and shares of Class B common stock into shares of Class A common stock
(520
)

(436
)
Diluted net income attributable to shareholders of Class A common stock
4,399

 
15,182

Basic weighted average Class A common shares outstanding
3,097


3,053

Effect of dilutive Class B common stock
10,750


10,750

Effect of dilutive convertible subordinated notes into shares of Class B common stock and shares of Class B common stock into shares of Class A common stock
351


118

Effect of dilutive restricted stock units
34

 
27

Diluted weighted average shares outstanding
14,232

 
13,948



 

Diluted EPS attributable to shareholders
$
0.31

 
$
1.09


Non-controlling Interest

From the Offering to May 4, 2015, the Company owned a 21.82% economic interest in Spark HoldCo, and NuDevco owned a 78.18% economic interest in Spark HoldCo. At September 30, 2015, the Company owns a 22.37% economic interest in Spark HoldCo, and is the sole managing member in Spark HoldCo, and NuDevco owns a 77.63% 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.
9. 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

25


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. On May 18, 2015, the Company granted restricted stock units to certain employees and non-employee directors. Thereafter, the Company periodically granted restricted stock units to certain employees. These restricted stock unit awards vest over one to four years, respectively, with the first vesting occurring on May 18, 2016 and each subsequent vesting date occurring each May 18 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 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.

On May 4, 2015, 118,629 restricted stock units vested, with 97,193 shares of common stock distributed to the holders of these units and with 21,436 shares of common stock withheld by the Company to cover taxes owed on the vesting of such units.

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 $0.6 million for the three months ended September 30, 2015 and $1.4 million for the nine months ended September 30, 2015 in general and administrative expense and a corresponding increase to additional paid in capital. During both the three and nine months ended September 30, 2014, the Company recognized stock based compensation expense of $0.2 million related to those awards issued on August 1, 2014. No compensation expense was recorded prior to August 1, 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 nine months ended September 30, 2015:

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

$
17.93

Granted
127,000

14.23

Dividend reinvestment issuances
20,506

14.70

Vested
(69,312
)
17.84

Forfeited
(22,534
)
16.50

Unvested at September 30, 2015
312,544

$
16.34


As of September 30, 2015, there was $4.3 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.


26


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 September 30, 2015 and $0.6 million for the nine months ended September 30, 2015 in general and administrative expense and a corresponding increase to liabilities. As of September 30, 2015, the Company's liabilities related to these restricted stock units were recorded in other current liabilities and other non-current liabilities of $0.4 million and zero, respectively. During both the three and nine months ended September 30, 2014, the Company recognized stock based compensation expense of $0.2 million related to those awards issued on August 1, 2014. No compensation expense was recorded prior to August 1, 2014 as there were no LTIP awards outstanding.

The following table summarizes liability classified restricted stock unit activity and unvested restricted stock units for the nine months ended September 30, 2015:

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

$
14.09

Granted
16,200

15.76

Dividend reinvestment issuances
7,788

15.69

Vested
(49,317
)
12.64

Forfeited


Unvested at September 30, 2015
98,764

$
15.21


As of September 30, 2015, there was $1.2 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 1.6 years.

10. 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

27


corporation and is subject to U.S. federal income taxation on our allocable share of taxable income from Spark HoldCo.

As of September 30, 2015, the Company had 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 on the Offering date. In addition, as of September 30, 2015, the Company had a long-term liability of $20.8 million for the effect of the Tax Receivable Agreement liability (See Note 12 “Transactions with Affiliates” for further discussion) and a corresponding long-term deferred tax asset of approximately $7.5 million.

The effective U.S. federal and state income tax rate for the nine months ended September 30, 2015 is 6.5% with respect to pre-tax income attributable to the Company's stockholders. Total income tax expense for the nine months ended September 30, 2015 differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income primarily due to state taxes, timing of discrete items and the impact of permanent differences between book and taxable income, most notably the income attributable to noncontrolling interest.
11. 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.
12. 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 PayableAffiliates
The Company recorded current accounts receivable-affiliates of $1.4 million and $1.2 million as of September 30, 2015 and December 31, 2014, respectively, and current accounts payable—affiliates of $1.9 million and $1.0 million as of September 30, 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.
Prepaid AssetsAffiliates

Prior to April 2015, the Company incurred and subsequently billed or allocated costs of certain employee benefit costs of behalf of affiliates commonly controlled by NuDevco. In April 2015, the Company began prepaying NuDevco for costs of certain employee benefits to be provided through the Company’s benefit plans and recorded current prepaid assets—affiliates of $0.1 million as of September 30, 2015.
Revenues and Cost of RevenuesAffiliates
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 September 30, 2015 and 2014 related to this agreement were $3.4 million and $6.5 million, respectively. Cost of revenues—affiliates, recorded in net asset optimization revenues in the condensed combined

28


and consolidated statements of operations for the nine months ended September 30, 2015 and 2014 related to this agreement were $9.6 million and $25.0 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 September 30, 2015 and 2014 related to these sales were $0.3 million and $3.2 million, respectively. Revenues—affiliates, recorded in net asset optimization revenues in the condensed combined and consolidated statements of operations for the nine months ended September 30, 2015 and 2014 related to these sales were $0.9 million and $10.3 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 and nine months ended September 30, 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 and nine months ended September 30, 2015. There was no in sales of electricity to the affiliate for the three months ended September 30, 2014 and $2.2 million for the nine months ended September 30, 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 and nine months ended September 30, 2015. There was no impact for the three months ended September 30, 2014 and loss of $0.6 million for the nine months ended September 30, 2014, respectively.
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, due diligence work, recurring management consulting, 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 $0.6 million and $0.8 million for the three months ended September 30, 2015 and 2014, respectively, and $2.3 million and $4.1 million for the nine months ended September 30, 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 or nine months ended September 30, 2015. There were no commissions paid to the affiliate for the three months ended September 30, 2014. Commissions paid to the affiliate were $0.1 million for the nine months ended September 30, 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.


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Member Distributions and Contributions
During the nine months ended September 30, 2015, the Company made distributions to NuDevco in connection with its holdings of units of Spark HoldCo of $11.7 million in conjunction with the payment of its fourth quarter 2014, first quarter 2015 and second quarter 2015 distributions. Additionally, during the nine months ended September 30, 2015, the Company received a contribution from NuDevco of $0.1 million as NuDevco forgave an account payable due to NuDevco that arose from the payment of withholding taxes related to the vesting of restricted stock units of certain employees of NuDevco who perform services for the Company. During the nine months ended September 30, 2014, the Company made net capital distributions to W. Keith Maxwell III of $36.4 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 10 “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. We did not meet the threshold coverage ratio required to fund the first payment to NuDevco Retail Holdings, LLC under the Tax Receivable Agreement during the four-quarter period ending September 30, 2015. As such, the initial payment under the Tax Receivable Agreement due in late 2015 will be deferred pursuant to the terms thereof.

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:
 
“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

30


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.

13. 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 $27.7 million and $45.9 million and asset optimization cost of revenues of $28.2 million and $46.0 million for the three months ended September 30, 2015 and 2014, respectively, which are presented on a net basis in asset optimization revenues. The Company recorded asset optimization revenues of $120.7 million and $225.4 million and asset optimization cost of revenues of $119.4 million and $223.7 million for the nine months ended September 30, 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 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.




31


Below is a reconciliation of retail gross margin to income before income tax expense (in thousands):
  
Three Months Ended September 30,
Nine Months Ended September 30,
  
2015

2014
2015

2014
Reconciliation of Retail Gross Margin to Income before taxes






Income before income tax expense
$
6,455


$
1,032

$
24,442


$
7,906

Interest and other income
(5
)

(40
)
(326
)

(111
)
Interest expense
800


615

1,415


1,150

Operating Income
7,250


1,607

25,531


8,945

Depreciation and amortization
7,557


4,113

17,873


10,324

General and administrative
15,493


10,634

43,909


28,494

Less:






Net asset optimization revenue
(545
)

(141
)
1,317


1,681

Net, Gains (losses) on non-trading derivative instruments
132


(1,163
)
(5,876
)

5,847

Net, Cash settlements on non-trading derivative instruments
4,035


3,039

12,643


(9,959
)
Retail Gross Margin
$
26,678


$
14,619

$
79,229


$
50,194


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 September 30, 2015
Retail
Electricity

Retail
Natural Gas

Corporate
and Other

Eliminations

Spark Retail
Total Revenues
$
76,913

 
$
14,354

 
$

 
$

 
$
91,267

Retail cost of revenues
50,787

 
10,180

 

 

 
60,967

Less:
 
 
 
 
 
 
 
 
 
Net asset optimization revenues

 
(545
)
 

 

 
(545
)
Gains (losses) on non-trading derivatives
3,891

 
(3,759
)
 

 

 
132

Current period settlements on non-trading derivatives
3,310

 
725

 

 

 
4,035

Retail Gross Margin
$
18,925

 
$
7,753

 
$

 
$

 
$
26,678

Total Assets
$
147,037

 
$
101,844

 
$
96,319

 
$
(184,747
)
 
$
160,453


Three Months Ended September 30, 2014
Retail
Electricity

Retail
Natural Gas

Corporate
and Other

Eliminations

Spark Retail
Total revenues
$
51,748


$
16,469


$


$


$
68,217

Retail cost of revenues
41,628


10,235






51,863

Less:









Net asset optimization revenues


(141
)





(141
)
Gains (losses) on non-trading derivatives
445


(1,608
)





(1,163
)
Current period settlements on non-trading derivatives
2,906


133






3,039

Retail Gross Margin
$
6,769


$
7,850


$


$


$
14,619

Total Assets
$
47,677


$
92,974


$
20,309


$
(38,886
)

$
122,074


32


Nine Months Ended September 30, 2015
Retail
Electricity

Retail
Natural Gas

Corporate
and Other

Eliminations

Spark Retail
Total revenues
$
170,060


$
93,253


$


$


$
263,313

Retail cost of revenues
122,864


53,136






176,000

Less:









Net asset optimization revenues


1,317






1,317

Gains (losses) on non-trading derivatives
(2,201
)

(3,675
)





(5,876
)
Current period settlements on non-trading derivatives
5,727


6,916






12,643

Retail Gross Margin
$
43,670


$
35,559


$


$


$
79,229

Total Assets
$
147,037


$
101,844


$
96,319


$
(184,747
)

$
160,453

Nine Months Ended September 30, 2014
Retail
Electricity

Retail
Natural Gas

Corporate
and Other

Eliminations

Spark Retail
Total revenues
$
137,968


$
102,166


$


$


$
240,134

Retail cost of revenues
114,997


77,374






192,371

Less:









Net asset optimization revenues


1,681






1,681

Gains (losses) on non-trading derivatives
6,037


(190
)





5,847

Current period settlements on non-trading derivatives
(7,585
)

(2,374
)





(9,959
)
Retail Gross Margin
$
24,519


$
25,675


$


$


$
50,194

Total Assets
$
47,677


$
92,974


$
20,309


$
(38,886
)

$
122,074

Significant Customers
For the three and nine months ended September 30, 2015, we had one significant customer that individually accounted for more than 10% of the Company’s consolidated net asset optimization revenues. For the three and nine months ended September 30, 2014, we had four and one significant customers, respectively, that individually accounted for more than 10% of the Company’s combined net asset optimization revenues.
For the three and nine months ended September 30, 2015 and 2014, no individual customer accounted for more than 10% of the Company's combined and consolidated retail electricity or retail natural gas total revenues.
Significant Suppliers
For the three and nine months ended September 30, 2015, we had one individual supplier that individually accounted for more than 10% of the Company’s consolidated net asset optimization revenues cost of revenues. For the three and nine months ended September 30, 2014, we had two and one significant suppliers, respectively, that individually accounted for more than 10% of the Company’s combined net asset optimization revenues cost of revenues.

For the three and nine months ended September 30, 2015, the Company had five and four significant suppliers, respectively, that individually accounted for more than 10% of the Company’s consolidated retail electricity retail cost of revenues. For the three and nine months ended September 30, 2014, the Company had one significant supplier that individually accounted for more than 10% of the Company's combined retail electricity retail cost of revenues.
For the three and nine months ended September 30, 2015 and 2014, no individual supplier accounted for more than 10% of the Company's combined and consolidated retail natural gas retail cost of revenues.


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14. Customer Acquisitions

On March 3, 2015, the Company entered into a purchase and sale agreement for the purchase of approximately 25,800 residential and commercial natural gas contracts in Northern California for a purchase price of approximately $2.0 million. The transaction closed in April 2015. The purchase price was capitalized as intangible assets - customer acquisitions and will be amortized over a three year period as customers begin using natural gas under a contract with the Company.
15. Equity Method Investment

Investment in eREX Spark Marketing Co., Ltd

In September 2015, the Company, together with eREX Co., Ltd., a Japanese company, entered into an agreement ("eREX JV Agreement") to form a new joint venture eREX Spark Marketing Co., Ltd ("eREX Spark"). As part of this agreement, the Company contributed 39.2 million Japanese Yen, or $0.3 million, for 20% ownership of eREX Spark. As certain conditions under the eREX JV Agreement are met, the Company is committed to make additional capital contributions totaling 117.2 million Japanese Yen, or $1.0 million through November 2016 based on exchange rates at September 30, 2015. Additionally, the Company is entitled to share in 30% of the dividends distributed by eREX Spark for the first year a qualifying dividend is paid and for the subsequent four years thereafter. After this period, dividends will be distributed proportionately with the equity ownership of eREX Spark. eREX Spark's board of directors consists of four directors, one of whom is appointed by the Company.

We account for non-marketable investments using the equity method of accounting if the investment gives us the ability to exercise significant influence over, but not control, of an investee. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting stock of the investee. Under the equity method of accounting, investments are stated at initial cost and are adjusted for subsequent additional investments and our proportionate share of earnings or losses and distributions.

Based on the Company's significant influence, as reflected by the 20% equity ownership and 25% control of the eREX Spark board of directors, we recorded the investment in eREX Spark as an equity method investment. Our investment in eREX Spark was $0.3 million as of September 30, 2015 and recorded in other assets in the condensed combined and consolidated balance sheet. As no significant activity has occurred since our initial investment in eREX Spark, no amounts were recorded in our condensed combined and consolidated statements of operations for the three and nine months ended September 30, 2015.
16. Subsequent Events

Declaration of Dividends

On October 21, 2015, the Company declared a quarterly dividend of $0.3625 to holders of record of our Class A common stock on November 30, 2015 and payable on December 14, 2015.

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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., whic