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EX-32 - EXHIBIT 32 CERTIFICATION BY CEO AND CFO - Spark Energy, Inc.certceoandcfoexh32-q12020.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION BY CFO - Spark Energy, Inc.certcfoexh312-q12020.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION BY CEO - Spark Energy, Inc.certceoexh311-q12020.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2020
 
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols(s)
Name of exchange on which registered
Class A common stock, par value $0.01 per share
SPKE
The NASDAQ Global Select Market
8.75% Series A Fixed-to-Floating Rate

Cumulative Redeemable Perpetual Preferred Stock, par value $0.01 per share
SPKEP
The NASDAQ Global Select Market
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.        
Large accelerated filer o                  Accelerated filer x 
Non-accelerated filer o Smaller reporting company o



Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 14,509,380 shares of Class A common stock, 20,800,000 shares of Class B common stock and 3,607,571 shares of Series A Preferred Stock outstanding as of May 4, 2020.




SPARK ENERGY, INC.
 
 
INDEX TO QUARTERLY REPORT ON FORM 10-Q
 
 
For the Quarter Ended March 31, 2020
 
 
 
 
Page No.
PART I. FINANCIAL INFORMATION
 
 
ITEM 1. FINANCIAL STATEMENTS
 
 
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2020 AND DECEMBER 31, 2019 (unaudited)
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (unaudited)
 
 
 
 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (unaudited)
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (unaudited)
 
 
 
 
NOTES TO THE CONDENSED 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 6. EXHIBITS
 
SIGNATURES
 


1


Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. These forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), can be identified by the use of forward-looking terminology including “may,” “should,” “likely,” “will,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “plan,” “intend,” “project,” or other similar words. All statements, other than statements of historical fact included in this Report, regarding strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans, objectives and beliefs of management are forward-looking statements. Forward-looking statements appear in a number of places in this Report and may include statements about expected impacts of COVID-19, business strategy and prospects for growth, customer acquisition costs, legal proceedings, ability to pay cash dividends, cash flow generation and liquidity, availability of terms of capital, competition and government regulation and general economic conditions. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove correct.
The forward-looking statements in this Report are subject to risks and uncertainties. Important factors that could cause actual results to materially differ from those projected in the forward-looking statements include, but are not limited to:

potential risks and uncertainties relating to the ultimate impact of COVID-19, including the geographic spread, the severity of the disease, the duration of the COVID-19 outbreak, actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact, and the potential negative impacts of COVID-19 on the global economy and financial markets;
changes in commodity prices;
the sufficiency of risk management and hedging policies and practices;
the impact of extreme and unpredictable weather conditions, including hurricanes and other natural disasters;
federal, state and local regulations, including the industry's ability to address or adapt to potentially restrictive new regulations that may be enacted by public utility commissions;
our ability to borrow funds and access credit markets;
restrictions in our debt agreements and collateral requirements;
credit risk with respect to suppliers and customers;
changes in costs to acquire customers as well as actual attrition rates;
accuracy of billing systems;
our ability to successfully identify, complete, and efficiently integrate acquisitions into our operations;
significant changes in, or new changes by, the independent system operators ("ISOs") in the regions we operate;
competition; and
the "Risk Factors" in our Annual Report Form 10-K for the year ended December 31, 2019, in "Item 1A— Risk Factors" of this Report, and in our other public filings and press releases.

You should review the risk factors and other factors noted throughout or incorporated by reference in this Report that could cause our actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements speak only as of the date of this Report. Unless required by law, we disclaim any obligation to publicly update or revise these statements whether as a result of new information, future events or otherwise. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.


2


PART I. — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
SPARK ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share counts)
(unaudited)

March 31, 2020

December 31, 2019
Assets



Current assets:



Cash and cash equivalents
$
54,466


$
56,664

Restricted cash
1,005


1,004

Accounts receivable, net of allowance for doubtful accounts of $5,935 at March 31, 2020 and $4,797 at December 31, 2019
79,801


113,635

Accounts receivable—affiliates
2,937


2,032

Inventory
264


2,954

Fair value of derivative assets
15


464

Customer acquisition costs, net
6,759


8,649

Customer relationships, net
12,676


13,607

Deposits
6,327


6,806

Renewable energy credit asset
32,504


24,204

Other current assets
10,161


6,109

Total current assets
206,915


236,128

Property and equipment, net
3,297


3,267

Fair value of derivative assets


106

Customer acquisition costs, net
9,072


9,845

Customer relationships, net
14,748


17,767

Deferred tax assets
30,333


29,865

Goodwill
120,343


120,343

Other assets
4,924


5,647

Total assets
$
389,632


$
422,968

Liabilities, Series A Preferred Stock and Stockholders' Equity



Current liabilities:



Accounts payable
$
34,654


$
48,245

Accounts payable—affiliates
934


1,009

Accrued liabilities
35,891


37,941

Renewable energy credit liability
37,918


33,120

Fair value of derivative liabilities
26,450


19,943

Other current liabilities
1,741


1,697

Total current liabilities
137,588


141,955

Long-term liabilities:





Fair value of derivative liabilities
1,832


495

Long-term portion of Senior Credit Facility
95,000


123,000

Other long-term liabilities
197


217

Total liabilities
234,617


265,667

Commitments and contingencies (Note 12)





Series A Preferred Stock, par value $0.01 per share, 20,000,000 shares authorized, 3,707,256 shares issued and 3,607,571 shares outstanding at March 31, 2020 and 3,707,256 shares issued and 3,677,318 shares outstanding at December 31, 2019
88,282


90,015

Stockholders' equity:





       Common Stock:





Class A common stock, par value $0.01 per share, 120,000,000 shares authorized, 14,494,981 shares issued and 14,395,535 shares outstanding at March 31, 2020 and 14,478,999 shares issued and 14,379,553 shares outstanding at December 31, 2019
145


145

Class B common stock, par value $0.01 per share, 60,000,000 shares authorized, 20,800,000 shares issued and outstanding at March 31, 2020 and 20,800,000 shares issued and outstanding at December 31, 2019
209


209

       Additional paid-in capital
52,710


51,842

       Accumulated other comprehensive loss
(40
)

(40
)
       Retained earnings
814


1,074

       Treasury stock, at cost, 99,446 shares at March 31, 2020 and December 31, 2019
(2,011
)

(2,011
)
       Total stockholders' equity
51,827


51,219

Non-controlling interest in Spark HoldCo, LLC
14,906


16,067

       Total equity
66,733


67,286

Total liabilities, Series A Preferred Stock and Stockholders' equity
$
389,632


$
422,968


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

3


SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)

Three Months Ended March 31,

2020

2019
Revenues:



Retail revenues
$
166,360


$
240,154

Net asset optimization revenues
321


2,552

Total Revenues
166,681


242,706

Operating Expenses:



Retail cost of revenues
118,823


195,255

General and administrative
25,676


29,476

Depreciation and amortization
8,796


12,155

Total Operating Expenses
153,295


236,886

Operating income
13,386


5,820

Other (expense)/income:



Interest expense
(1,553
)

(2,223
)
Interest and other income
160


189

Total other expenses
(1,393
)

(2,034
)
Income before income tax expense
11,993


3,786

Income tax expense
1,925


1,041

Net income
$
10,068


$
2,745

Less: Net income attributable to non-controlling interests
5,589


1,963

Net income attributable to Spark Energy, Inc. stockholders
$
4,479


$
782

Less: Dividend on Series A Preferred Stock
1,500


2,027

Net income (loss) attributable to stockholders of Class A common stock
$
2,979


$
(1,245
)
Other comprehensive income (loss), net of tax:



Currency translation loss
$


$
(35
)
Other comprehensive loss


(35
)
Comprehensive income
$
10,068


$
2,710

Less: Comprehensive income attributable to non-controlling interests
5,589


1,943

Comprehensive income attributable to Spark Energy, Inc. stockholders
$
4,479


$
767





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



       Basic
$
0.21


$
(0.09
)
       Diluted
$
0.20


$
(0.09
)





Weighted average shares of Class A common stock outstanding




       Basic
14,381


14,135

       Diluted
14,784


14,135








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

4


SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31, 2020
 
Issued Shares of Class A Common Stock
Issued Shares of Class B Common Stock
Treasury Stock
Class A Common Stock
Class B Common Stock
Treasury Stock
Accumulated Other Comprehensive Loss
Additional Paid-in Capital
Retained Earnings (Deficit)
Total Stockholders' Equity
Non-controlling Interest
Total Equity
Balance at December 31, 2019
14,479

20,800

(99
)
$
145

$
209

$
(2,011
)
$
(40
)
$
51,842

$
1,074

$
51,219

$
16,067

$
67,286

Impact of adoption of ASC 326








(633
)
(633
)

(633
)
Balance at January 1, 2020
14,479

20,800

(99
)
145

209

(2,011
)
(40
)
51,842

441

50,586

16,067

66,653

Stock based compensation








1,329


1,329


1,329

Restricted stock unit vesting
16







(39
)

(39
)

(39
)
Consolidated net income








4,479

4,479

5,589

10,068

Distributions paid to non-controlling unit holders










(7,172
)
(7,172
)
Dividends paid to Class A common stockholders ($0.18125 per share)








(2,606
)
(2,606
)

(2,606
)
Dividends paid to Preferred Stockholders








(1,500
)
(1,500
)

(1,500
)
Changes in ownership interest







(422
)

(422
)
422


Balance at March 31, 2020
14,495

20,800

(99
)
$
145

$
209

$
(2,011
)
$
(40
)
$
52,710

$
814

$
51,827

$
14,906

$
66,733

 
 
 
 
 
 
 
 
 
 
 
 
 











5


THREE MONTHS ENDED MARCH 31, 2019
 
Issued Shares of Class A Common Stock
Issued Shares of Class B Common Stock
Treasury Stock
Class A Common Stock
Class B Common Stock
Treasury Stock
Accumulated Other Comprehensive Loss
Additional Paid-in Capital
Retained Earnings (Deficit)
Total Stockholders' Equity
Non-controlling Interest
Total Equity
Balance at December 31, 2018
14,178

20,800

(99
)
$
142

$
209

$
(2,011
)
$
2

$
46,157

$
1,307

$
45,806

$
44,488

$
90,294

Stock based compensation
63







1,071


1,071


1,071

Consolidated net income








782

782

1,963

2,745

Foreign currency translation adjustment for equity method investee






(14
)


(14
)
(21
)
(35
)
Distributions paid to non-controlling unit holders










(3,770
)
(3,770
)
Dividends paid to Class A common stockholders ($0.18125 per share)







(2,564
)

(2,564
)

(2,564
)
Changes in ownership interest







1,059


1,059

(1,059
)

Dividends to Preferred Stockholders








(2,027
)
(2,027
)

(2,027
)
Proceeds from disgorgement of stockholder short-swing profits







46


46


46

Acquisition of Customers from Affiliate










(10
)
(10
)
Balance at March 31, 2019
14,241

20,800

(99
)
$
142

$
209

$
(2,011
)
$
(12
)
$
45,769

$
62

$
44,159

$
41,591

$
85,750

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

6


SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
  
Three Months Ended March 31,
  
2020
 
2019
Cash flows from operating activities:

 

Net income
$
10,068

 
$
2,745

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

 

Depreciation and amortization expense
8,796

 
12,159

Deferred income taxes
(468
)
 
59

Stock based compensation
1,324

 
1,172

Amortization of deferred financing costs
250

 
268

Bad debt expense
2,355

 
3,849

Loss on derivatives, net
24,587

 
19,541

Current period cash settlements on derivatives, net
(16,293
)
 
(7,106
)
Other

 
(137
)
Changes in assets and liabilities:

 

Decrease in accounts receivable
30,847


16,129

Increase in accounts receivable—affiliates
(905
)

(73
)
Decrease in inventory
2,690


3,643

Increase in customer acquisition costs
(1,345
)
 
(5,789
)
Increase in prepaid and other current assets
(11,967
)

(5,692
)
Decrease (increase) in other assets
289

 
(102
)
Decrease in accounts payable and accrued liabilities
(10,892
)

(11,322
)
Decrease in accounts payable—affiliates
(75
)

(18
)
Increase in other current liabilities
149


390

Increase in other non-current liabilities
(21
)
 
333

Net cash provided by operating activities
39,389

 
30,049

Cash flows from investing activities:

 

Purchases of property and equipment
(536
)
 
(254
)
Acquisition of Customers from Affiliate

 
(5,869
)
Net cash used in investing activities
(536
)
 
(6,123
)
Cash flows from financing activities:

 

Buyback of Series A Preferred Stock
(1,222
)
 

Borrowings on notes payable
75,000

 
64,500

Payments on notes payable
(103,000
)
 
(93,500
)
Payments on the Verde promissory note

 
(1,036
)
Proceeds from disgorgement of stockholders short-swing profits

 
46

Restricted stock vesting
(39
)
 

Payment of dividends to Class A common stockholders
(2,606
)
 
(2,564
)
Payment of distributions to non-controlling unitholders
(7,172
)
 
(3,770
)
Payment of Preferred Stock dividends
(2,011
)
 
(2,027
)
Payment to affiliates for acquisition of customer book

 
(10
)
Net cash used in financing activities
(41,050
)
 
(38,361
)
Decrease in Cash, cash equivalents and Restricted cash
(2,197
)
 
(14,435
)
Cash, cash equivalents and Restricted cash—beginning of period
57,668

 
49,638

Cash, cash equivalents and Restricted cash—end of period
$
55,471

 
$
35,203

Supplemental Disclosure of Cash Flow Information:

 

Non-cash items:


 


        Property and equipment purchase accrual
$
55

 
$
2

Cash paid during the period for:

 

Interest
$
1,327

 
$
2,099

Taxes
$
465

 
$
(3,147
)
The accompanying notes are an integral part of the condensed consolidated financial statements.

7


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

We are 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. Spark Energy, Inc. (the "Company") is a holding company whose sole material asset consists of units in Spark HoldCo, LLC (“Spark HoldCo”). 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. Spark HoldCo is the direct and indirect owner of the subsidiaries through which we operate. We conduct our business through several brands across our service areas, including Electricity Maine, Electricity N.H., Major Energy, Provider Power Massachusetts, Respond Power, Spark Energy, and Verde Energy.
2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial 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") as it applies to interim financial statements. This information should be read along with our consolidated financial statements and notes contained in our annual report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). Our unaudited condensed consolidated financial statements are presented on a consolidated basis and include all wholly-owned and controlled subsidiaries. We account for investments over which we have significant influence but not a controlling financial interest using the equity method of accounting. All significant intercompany transactions and balances have been eliminated in the unaudited condensed consolidated financial statements.

In the opinion of the Company's management, the accompanying condensed consolidated financial statements reflect all adjustments that are necessary to fairly present the financial position, the results of operations, the changes in equity and the cash flows of the Company for the respective periods. Such adjustments are of a normal recurring nature, unless otherwise disclosed.

Use of Estimates and Assumptions
The preparation of our condensed consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim financial statements and the reported amounts of revenues and expenses during the period. Actual results could materially differ from those estimates.

Restricted Cash

As part of the acquisition of RCEs from Starion Energy, Inc., Starion NY Inc. and Starion Energy PA Inc. (collectively "Starion") in 2018, we funded an escrow account, the balance of which is reflected as restricted cash in our consolidated balance sheet. As of March 31, 2020 and December 31, 2019, the balance in the escrow account related to Starion acquisition was $1.0 million and $1.0 million, respectively. The balance remaining as of March 31, 2020 represents a holdback of amounts due to the seller for acquired customers that will be released to the seller in June 2020, subject to the conditions outlined in the asset purchase agreement.

Relationship with our Founder and Majority Shareholder

8



W. Keith Maxwell, III (our "Founder") is the owner of a majority of the voting power of our common stock through his ownership of NuDevco Retail, LLC ("NuDevco Retail") and Retailco, LLC ("Retailco"). Retailco is a wholly owned subsidiary of TxEx Energy Investments, LLC ("TxEx"), which is wholly owned by Mr. Maxwell. NuDevco Retail is a wholly owned subsidiary of NuDevco Retail Holdings LLC ("NuDevco Retail Holdings"), which is a wholly owned subsidiary of Electric HoldCo, LLC, which is also a wholly owned subsidiary of TxEx.

In March 2020, the Board of Directors (the "Board") of the Company appointed W. Keith Maxwell III as interim Chief Executive Officer.

New Accounting Standards Recently Adopted

There have been no changes to our significant accounting policies as disclosed in our 2019 Form 10-K, except as follows:

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 requires entities to use a current expected credit loss ("CECL") model, which is a new impairment model based on expected losses rather than incurred losses on financial assets, including trade accounts receivables. The model requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted ASU 2016-13 and the related amendments effective January 1, 2020, and the adoption resulted in $0.6 million adjustment to retained earnings on January 1, 2020.

Standards Being Evaluated/Standards Not Yet Adopted

Below are accounting standards that have been issued, but not yet been adopted by the Company at March 31, 2020. The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes ("ASU 2019-12"). These amendments simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We do not expect adoption of the new standard to have a material impact to our consolidated statement of operations.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We do not expect adoption of the new standard to have a material impact to our consolidated statement of operations.

3. Revenues
Our revenues are derived primarily from the sale of natural gas and electricity to customers, including affiliates. Revenue is measured based upon the quantity of gas or power delivered at prices contained or referenced in the customer's contract, and excludes any sales incentives (e.g. rebates) and amounts collected on behalf of third parties (e.g. sales tax).


9


Our revenues also include asset optimization activities. Asset optimization activities consist primarily of purchases and sales of gas that meet the definition of trading activities per FASB ASC Topic 815, Derivatives and Hedging. They are therefore excluded from the scope of FASB ASC Topic 606, Revenue from Contracts with Customers.

Revenues for electricity and natural gas sales are recognized under the accrual method when our performance obligation to a customer is satisfied, which is the point in time when the product is delivered and control of the product passes to the customer. Electricity and natural gas products may be sold as fixed-price or variable-price products. The typical length of a contract to provide electricity and/or natural gas is twelve months. Customers are billed and typically pay at least monthly, based on usage. Electricity and natural gas sales that have been delivered but not billed by period end are estimated and recorded as accrued unbilled revenues based on estimates of customer usage since the date of the last meter read provided by the utility. Volume estimates are based on forecasted volumes and estimated residential and commercial customer usage. Unbilled revenues are calculated by multiplying these volume estimates by the applicable rate by customer class (residential or commercial). Estimated amounts are adjusted when actual usage is known and billed.

The following table discloses revenue by primary geographical market, customer type, and customer credit risk profile (in thousands). The table also includes a reconciliation of the disaggregated revenue to revenue by reportable segment (in thousands).
 
Reportable Segments
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
Retail Electricity

Retail Natural Gas

Total Reportable Segments
 
Retail Electricity

Retail Natural Gas

Total Reportable Segments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary markets (a)
 
 
 
 
 
 
 
 
 
 
 
  New England
$
46,593

 
$
7,054

 
$
53,647

 
$
76,234

 
$
8,528

 
$
84,762

  Mid-Atlantic
45,842

 
15,804

 
61,646

 
66,811

 
21,369

 
88,180

  Midwest
14,989

 
13,607

 
28,596

 
22,107

 
20,489

 
42,596

  Southwest
14,344

 
8,127

 
22,471

 
16,940

 
7,676

 
24,616


$
121,768

 
$
44,592

 
$
166,360

 
$
182,092

 
$
58,062

 
$
240,154


 
 
 
 

 
 
 
 
 
 
Customer type
 
 
 
 
 
 
 
 
 
 
 
  Commercial
$
40,015

 
$
15,517

 
$
55,532

 
$
67,235

 
$
19,867

 
$
87,102

  Residential
93,228

 
33,363

 
126,591

 
124,768

 
41,095

 
165,863

  Unbilled revenue (b)
(11,475
)
 
(4,288
)
 
(15,763
)
 
(9,911
)
 
(2,900
)
 
(12,811
)

$
121,768

 
$
44,592

 
$
166,360

 
$
182,092

 
$
58,062

 
$
240,154


 
 
 
 
 
 
 
 
 
 
 
Customer credit risk
 
 
 
 

 
 
 
 
 
 
  POR
$
84,913

 
$
23,037

 
$
107,950

 
$
128,937

 
$
28,979

 
$
157,916

  Non-POR
36,855

 
21,555

 
58,410

 
53,155

 
29,083

 
82,238


$
121,768

 
$
44,592

 
$
166,360

 
$
182,092

 
$
58,062

 
$
240,154

 
 
 
 
 
 
 
 
 
 
 
 
(a) The primary markets include the following states:

New England - Connecticut, Maine, Massachusetts, New Hampshire;
Mid-Atlantic - Delaware, Maryland (including the District of Colombia), New Jersey, New York and Pennsylvania;
Midwest - Illinois, Indiana, Michigan and Ohio; and

10


Southwest - Arizona, California, Colorado, Florida, Nevada, and Texas.

(b) Unbilled revenue is recorded in total until it is actualized, at which time it is categorized between commercial and residential customers.

We record gross receipts taxes on a gross basis in retail revenues and retail cost of revenues. During the three months ended March 31, 2020 and 2019, our retail revenues included gross receipts taxes of $0.3 million and $0.4 million, respectively, and our retail cost of revenues included gross receipts taxes of $1.7 million and $2.7 million, respectively.

4. Equity

Non-controlling Interest

We hold an economic interest and are the sole managing member in Spark HoldCo, with affiliates of our Founder, majority shareholder and interim Chief Executive Officer holding the remaining economic interests in Spark HoldCo. As a result, we consolidate the financial position and results of operations of Spark HoldCo, and reflect the economic interests owned by these affiliates as a non-controlling interest. The Company and affiliates owned the following economic interests in Spark HoldCo at March 31, 2020 and December 31, 2019, respectively.

 
The Company
Affiliated Owners
March 31, 2020
41.07
%
58.93
%
December 31, 2019
41.04
%
58.96
%

The following table summarizes the portion of net income (loss) and income tax expense (benefit) attributable to non-controlling interest (in thousands):

Three Months Ended March 31,

2020

2019
 


 
Net income allocated to non-controlling interest
$
6,085


$
993

Income tax expense (benefit) allocated to non-controlling interest
496


(970
)
Net income attributable to non-controlling interest
$
5,589


$
1,963


Class A Common Stock and Class B Common Stock

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

Dividends declared for the Company's Class A common stock are reported as a reduction of retained earnings, or a reduction of additional paid in capital to the extent retained earnings are exhausted. During the three months ended March 31, 2020, we paid $2.6 million in dividends to the holders of the Company's Class A common stock. This dividend represented a quarterly rate of $0.18125 per share on each share of Class A common stock.

In order to pay our stated dividends to holders of our Class A common stock, our subsidiary, Spark HoldCo is required to make corresponding distributions to holders of its units, including those holders that own our Class B common stock (our non-controlling interest holder). As a result, during the three months ended March 31, 2020, Spark HoldCo made corresponding distributions of $3.8 million to our non-controlling interest holders.


11


Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income attributable to stockholders (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 are not participating securities and have no economic interests. Diluted earnings per share is similarly calculated except that the denominator is increased by potentially dilutive securities.


The following table presents the computation of basic and diluted income (loss) per share for the three months ended March 31, 2020 and 2019 (in thousands, except per share data):

Three Months Ended March 31,

2020
 
2019
Net income attributable to Spark Energy, Inc. stockholders
$
4,479

 
$
782

Less: Dividend on Series A preferred stock
1,500

 
2,027

Net income (loss) attributable to stockholders of Class A common stock
$
2,979

 
$
(1,245
)
 
 
 
 
Basic weighted average Class A common shares outstanding
14,381

 
14,135

Basic income (loss) per share attributable to stockholders
$
0.21

 
$
(0.09
)

 
 
 
Net income (loss) attributable to stockholders of Class A common stock
$
2,979

 
$
(1,245
)
Effect of conversion of Class B common stock to shares of Class A common stock

 

Diluted net income (loss) attributable to stockholders of Class A common stock
$
2,979

 
$
(1,245
)
 
 
 
 
Basic weighted average Class A common shares outstanding
14,381

 
14,135

Effect of dilutive Class B common stock

 

Effect of dilutive restricted stock units
403

 

Diluted weighted average shares outstanding
14,784

 
14,135


 
 
 
Diluted income (loss) per share attributable to stockholders
$
0.20

 
$
(0.09
)

The computation of diluted earnings per share for the three months ended March 31, 2020 excludes 20.8 million shares of Class B common stock because the effect of their conversion was antidilutive. The Company's outstanding shares of Series A Preferred Stock were not included in the calculation of diluted earnings per share because they contain only contingent redemption provisions that have not occurred.

Variable Interest Entity

Spark HoldCo is a variable interest entity due to its lack of rights to participate in significant financial and operating decisions and its inability to dissolve or otherwise remove its management. Spark HoldCo owns all of the

12


outstanding membership interests in each of our operating subsidiaries. We are the sole managing member of Spark HoldCo, manage Spark HoldCo's operating subsidiaries through this managing membership interest, and are considered the primary beneficiary of Spark HoldCo. The assets of Spark HoldCo cannot be used to settle our obligations except through distributions to us, and the liabilities of Spark HoldCo cannot be settled by us except through contributions to Spark HoldCo. The following table includes the carrying amounts and classification of the assets and liabilities of Spark HoldCo that are included in our condensed consolidated balance sheet as of March 31, 2020 and December 31, 2019 (in thousands):


March 31, 2020
December 31, 2019
Assets

 
Current assets:

 
   Cash and cash equivalents
$
54,196

$
56,598

   Accounts receivable
79,801

113,635

   Other current assets
69,419

64,476

   Total current assets
203,416

234,709

Non-current assets:

 
   Goodwill
120,343

120,343

   Other assets
36,787

37,826

   Total non-current assets
157,130

158,169

   Total Assets
$
360,546

$
392,878



 
Liabilities

 
Current liabilities:

 
   Accounts payable and accrued liabilities
$
70,482

$
86,097

   Other current liabilities
80,107

65,863

   Total current liabilities
150,589

151,960

Long-term liabilities:

 
   Long-term portion of Senior Credit Facility
95,000

123,000

   Other long-term liabilities
2,029

712

   Total long-term liabilities
97,029

123,712

   Total Liabilities
$
247,618

$
275,672


5. Preferred Stock

In May 2019, we commenced a share repurchase program (the "Repurchase Program") of our Series A Preferred Stock. The Repurchase Program allowed us to purchase our Series A Preferred Stock through May 20, 2020, and there was no dollar limit on the amount of Series A Preferred Stock that may be repurchased, nor did the Repurchase Program obligate the Company to make any repurchases.

In November 2019, we amended and extended our Repurchase Program of our Series A Preferred Stock. The Repurchase Program allows us to purchase Series A Preferred Stock through December 31, 2020, at prevailing prices, in open market or negotiated transactions, subject to market conditions, maximum share prices and other considerations. The Repurchase Program does not obligate us to make any repurchases and may be suspended at any time.

During the three months ended March 31, 2020, we repurchased 69,747 shares of Series A Preferred Stock at a weighted-average price of $17.51 per share, for a total cost of approximately $1.2 million.


13


Holders of the Series A Preferred Stock have no voting rights, except in specific circumstances of delisting or in the case the dividends are in arrears as specified in the Series A Preferred Stock Certificate of Designations. The Series A Preferred Stock accrue dividends at an annual percentage rate of 8.75%, and the liquidation preference provisions of the Series A Preferred Stock are considered contingent redemption provisions because there are rights granted to the holders of the Series A Preferred Stock that are not solely within our control upon a change in control of the Company. Accordingly, the Series A Preferred Stock is presented between liabilities and the equity sections in the accompanying condensed consolidated balance sheet.

During the three months ended March 31, 2020, we paid $2.0 million in dividends to holders of the Series A Preferred Stock. As of March 31, 2020, we had accrued $2.0 million related to dividends to holders of the Series A Preferred Stock. This dividend was paid on April 15, 2020.

A summary of our preferred equity balance for the three months ended March 31, 2020 is as follows:


(in thousands)
Balance at December 31, 2019

$
90,015

Accumulated dividends on Series A Preferred Stock

(38
)
Repurchase of Series A Preferred Stock

(1,695
)
Balance at March 31, 2020
 
$
88,282


6. Derivative Instruments

We are exposed to the impact of market fluctuations in the price of electricity and natural gas, basis differences in the price of natural gas, storage charges, renewable energy credits ("RECs"), and capacity charges from independent system operators. We use derivative instruments in an effort to manage our cash flow exposure to these risks. These instruments are not designated as hedges for accounting purposes, and, accordingly, changes in the market value of these derivative instruments are recorded in the cost of revenues. As part of our strategy to optimize pricing in our natural gas related activities, we also manage a portfolio of commodity derivative instruments held for trading purposes. Our commodity trading activities are subject to limits within our 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 our condensed consolidated balance sheets when the derivative instruments are executed with the same counterparty under a master netting arrangement. Our 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 third parties. To the extent we have paid or received collateral related to the derivative assets or liabilities, such amounts would be presented net against the related derivative asset or liability’s fair value. As of March 31, 2020 and December 31, 2019, we had paid $1.6 million and $1.7 million, respectively, in collateral. The specific types of derivative instruments we may execute to manage the commodity price risk include the following:

Forward contracts, which commit us 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 for which we made a normal purchase, normal sale election and are therefore not accounted for at fair value including the following:

14



Forward electricity and natural gas purchase contracts for retail customer load;
Renewable energy credits; and
Natural gas transportation contracts and storage agreements.


Volumes Underlying Derivative Transactions
The following table summarizes the net notional volumes of our open derivative financial instruments accounted for at fair value by commodity. Positive amounts represent net buys while bracketed amounts are net sell transactions (in thousands):
Non-trading 
Commodity
Notional

March 31, 2020

December 31, 2019
Natural Gas
MMBtu

4,510


6,130

Natural Gas Basis
MMBtu

5


42

Electricity
MWh

4,678


6,015

Trading
Commodity
Notional

March 31, 2020

December 31, 2019
Natural Gas
MMBtu

154


204

Natural Gas Basis
MMBtu





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

Three Months Ended March 31,
  
2020

2019
Loss on non-trading derivatives, net
$
(24,533
)

$
(19,803
)
 (Loss) gain on trading derivatives, net
(54
)

262

Loss on derivatives, net
(24,587
)

(19,541
)
Current period settlements on non-trading derivatives (1)
16,609


8,125

Current period settlements on trading derivatives
(1
)

(100
)
Total current period settlements on derivatives
$
16,608


$
8,025


(1) Excludes settlements of $(0.3) million and $(0.9) million, respectively, for the three months ended March 31, 2020 and 2019 related to power call options.
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 cost of revenues on the condensed consolidated statements of operations.

15


Fair Value of Derivative Instruments
The following tables summarize the fair value and offsetting amounts of our derivative instruments by counterparty and collateral received or paid (in thousands):
  
March 31, 2020
Description
Gross Assets

Gross
Amounts
Offset

Net Assets

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
2,647


$
(2,632
)

$
15


$


$
15

Trading commodity derivatives
2


(2
)






Total Current Derivative Assets
2,649


(2,634
)

15




15

Non-trading commodity derivatives









Trading commodity derivatives









Total Non-current Derivative Assets









Total Derivative Assets
$
2,649


$
(2,634
)

$
15


$


$
15



March 31, 2020
Description
Gross 
Liabilities

Gross
Amounts
Offset

Net
Liabilities

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
(39,814
)

$
11,809


$
(28,005
)

$
1,555


$
(26,450
)
Trading commodity derivatives
(126
)

126







Total Current Derivative Liabilities
(39,940
)

11,935


(28,005
)

1,555


(26,450
)
Non-trading commodity derivatives
(2,634
)

796


(1,838
)

6


(1,832
)
Trading commodity derivatives









Total Non-current Derivative Liabilities
(2,634
)

796


(1,838
)

6


(1,832
)
Total Derivative Liabilities
$
(42,574
)

$
12,731


$
(29,843
)

$
1,561


$
(28,282
)

  
December 31, 2019
Description
Gross Assets

Gross
Amounts
Offset

Net Assets

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
570


$
(275
)

$
295


$


$
295

Trading commodity derivatives
170


(1
)

169




169

Total Current Derivative Assets
740


(276
)

464




464

Non-trading commodity derivatives
333


(227
)

106




106

Trading commodity derivatives









Total Non-current Derivative Assets
333


(227
)

106




106

Total Derivative Assets
$
1,073


$
(503
)

$
570


$


$
570



16



December 31, 2019
Description
Gross 
Liabilities

Gross
Amounts
Offset

Net
Liabilities

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
(34,434
)

$
12,859


$
(21,575
)

$
1,632


$
(19,943
)
Trading commodity derivatives
(194
)

194







Total Current Derivative Liabilities
(34,628
)

13,053


(21,575
)

1,632


(19,943
)
Non-trading commodity derivatives
(1,951
)

1,422


(529
)

34


(495
)
Trading commodity derivatives









Total Non-current Derivative Liabilities
(1,951
)

1,422


(529
)

34


(495
)
Total Derivative Liabilities
$
(36,579
)

$
14,475


$
(22,104
)

$
1,666


$
(20,438
)

7. Property and Equipment
Property and equipment consist of the following (in thousands):

Estimated useful
lives (years)
 
March 31, 2020
 
December 31, 2019
Information technology
2 – 5
 
$
22,595

 
$
22,005

Furniture and fixtures
2 – 5
 
1,802

 
1,802

Total

 
24,397

 
23,807

Accumulated depreciation

 
(21,100
)
 
(20,540
)
Property and equipment—net

 
$
3,297

 
$
3,267

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 each of March 31, 2020 and December 31, 2019, information technology includes $0.2 million and $0.6 million, respectively, of costs associated with assets not yet placed into service.
Depreciation expense recorded in the condensed consolidated statements of operations was $0.6 million and $0.7 million, respectively, for the three months ended March 31, 2020 and 2019.

17


8. Intangible Assets
Goodwill, customer relationships and trademarks consist of the following amounts (in thousands):
 
March 31, 2020
 
December 31, 2019
Goodwill
$
120,343

 
$
120,343

Customer relationships—Acquired

 

Cost
$
64,083

 
$
64,083

Accumulated amortization
(42,760
)
 
(40,231
)
Customer relationshipsAcquired & Non-Compete Agreements, net
$
21,323

 
$
23,852

Customer relationships—Other

 

Cost
$
17,056

 
$
17,056

Accumulated amortization
(10,955
)
 
(9,534
)
Customer relationshipsOther, net
$
6,101

 
$
7,522

Trademarks

 

Cost
$
7,570

 
$
8,502

Accumulated amortization
(2,139
)
 
(2,794
)
Trademarks, net
$
5,431

 
$
5,708


Changes in goodwill, customer relationships (including non-compete agreements) and trademarks consisted of the following (in thousands):

Goodwill
 
Customer Relationships Acquired & Non-Compete Agreements
 
Customer Relationships Other
 
Trademarks
Balance at December 31, 2019
$
120,343

 
$
23,852

 
$
7,522

 
$
5,708

Additions

 

 

 

Amortization

 
(2,529
)
 
(1,421
)
 
(277
)
Balance at March 31, 2020
$
120,343

 
$
21,323

 
$
6,101

 
$
5,431


Estimated future amortization expense for customer relationships and trademarks at March 31, 2020 is as follows (in thousands):
Year ending December 31,

2020 (remaining nine months)
$
10,490

2021
13,142

2022
6,194

2023
605

2024
404

> 5 years
2,020

Total
$
32,855


18


9. Debt
Debt consists of the following amounts as of March 31, 2020 and December 31, 2019 (in thousands):

March 31, 2020
 
December 31, 2019
Long-term debt:
 
 
 
  Senior Credit Facility (1) (2)
95,000

 
123,000

Total long-term debt
95,000

 
123,000

Total debt
$
95,000

 
$
123,000

(1) As of March 31, 2020 and December 31, 2019, the weighted average interest rate on the Senior Credit Facility was 4.14% and 4.71%, respectively.
(2) As of March 31, 2020 and December 31, 2019, we had $35.2 million and $37.4 million in letters of credit issued, respectively.

Capitalized financing costs associated with our Senior Credit Facility were $1.0 million and $1.3 million as of March 31, 2020 and December 31, 2019, respectively. Of these amounts, $0.9 million and $0.9 million are recorded in other current assets, and $0.1 million and $0.4 million are recorded in other non-current assets in the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively.
Interest expense consists of the following components for the periods indicated (in thousands):

Three Months Ended March 31,

2020
 
2019
Senior Credit Facility
$
911

 
$
1,442

Verde promissory note

 
141

Letters of credit fees and commitment fees
392

 
368

Amortization of deferred financing costs 
250

 
268

Subordinated debt

 
4

Interest Expense
$
1,553

 
$
2,223


Senior Credit Facility

The Company, as guarantor, and Spark HoldCo (the “Borrower” and, together with each subsidiary of Spark HoldCo (“Co-Borrowers”)) maintain a senior secured borrowing base credit facility (as amended, “Senior Credit Facility”) that allows us to borrow on a revolving basis and has a maximum borrowing capacity of $217.5 million as of March 31, 2020. Subject to applicable sublimits and terms of the Senior Credit Facility, as amended, borrowings are available for the issuance of letters of credit (“Letters of Credit”), working capital and general purpose revolving credit loans (“Working Capital Loans”), and bridge loans (“Bridge Loans”) for the purpose of partial funding for acquisitions. Borrowings under the Senior Credit Facility may be used to pay fees and expenses in connection with the Senior Credit Facility, finance ongoing working capital requirements and general corporate purpose requirements of the Co-Borrowers, to provide partial funding for acquisitions, as allowed under terms of the Senior Credit Facility, and to make open market purchases of our Class A common stock and Series A Preferred Stock.

The Senior Credit Facility will mature on May 19, 2021, and all amounts outstanding thereunder will be payable on the maturity date. Borrowings under the Bridge Loan sublimit, if any, will be repaid 25% per year on a quarterly basis (or 6.25% per quarter), with the remainder due at maturity. As of March 31, 2020, there was zero Bridge Loans outstanding.

At our election, the interest rate for Working Capital Loans and Letters of Credit under the Senior Credit Facility is generally determined by reference to the Eurodollar rate plus an applicable margin of up to 3.00% per annum (based on the prevailing utilization) or an alternate base rate plus an applicable margin of up to 2.00% per annum (based on the prevailing utilization). The alternate base rate is equal to the highest of (i) the prime rate (as published

19


in the Wall Street Journal), (ii) the federal funds rate plus 0.50% per annum, or (iii) the reference Eurodollar rate plus 1.00%.

Bridge Loan borrowings, if any, under the Senior Credit Facility are generally determined by reference to the Eurodollar rate plus an applicable margin of 3.75% per annum or an alternate base rate plus an applicable margin of 2.75% per annum. The alternate base rate is equal to the highest of (i) the prime rate (as published in the Wall Street Journal), (ii) the federal funds rate plus 0.50% per annum, or (iii) the reference Eurodollar rate plus 1.00%.

The Co-Borrowers pay a commitment fee of 0.50% quarterly in arrears on the unused portion of the Senior Credit Facility. In addition, the Co-Borrowers are subject to additional fees including an upfront fee, an annual agency fee, and letter of credit fees based on a percentage of the face amount of letters of credit payable to any syndicate member that issues a letter of credit.

The Senior Credit Facility contains covenants that, among other things, require the maintenance of specified ratios or conditions including:

Minimum Fixed Charge Coverage Ratio. We must maintain a minimum fixed charge coverage ratio of not less than 1.25 to 1.00. The Fixed Charge Coverage Ratio is defined as the ratio of (a) Adjusted EBITDA to (b) the sum of consolidated (with respect to the Company and the Co-Borrowers) interest expense (other than interest paid-in-kind in respect of certain subordinated debt but including interest in respect of that certain promissory note made by CenStar Energy Corp. ("CenStar") in connection with the permitted acquisition from Verde Energy USA Holdings, LLC), letter of credit fees, commitment fees, acquisition earn-out payments (excluding earnout payments funded with proceeds from newly issued preferred or common equity), distributions, the aggregate amount of repurchases of our Class A common stock, Series A Preferred Stock, or commitments for such purchases, taxes and scheduled amortization payments. The Senior Credit Facility permits, upon satisfaction of a Step-Down Condition, for the Company to elect to reduce the minimum required Fixed Charge Coverage Ratio from 1.25 to 1.00 to 1.10 to 1.00 for a period of one year. A Step-Down Condition is defined as the consummation by the Company of share buybacks of its Series A Preferred Stock under the Repurchase Program with an aggregate purchase price not less than $10.0 million.

Maximum Total Leverage Ratio. We must maintain a ratio of total indebtedness (excluding eligible subordinated debt and letter of credit obligations) to Adjusted EBITDA of no more than 2.50 to 1.00.

Maximum Senior Secured Leverage Ratio. We must maintain a Senior Secured Leverage Ratio of no more than 1.85 to 1.00. The Senior Secured Leverage Ratio is defined as the ratio of (a) all indebtedness of the loan parties on a consolidated basis that is secured by a lien on any property of any loan party (including the effective amount of all loans then outstanding under the Senior Credit Facility) plus 50% of the effective amount of letter of credit obligations attributable to performance standby letters of credit to (b) Adjusted EBITDA.

The Senior Credit Facility contains various negative covenants that limit our ability to, among other things, incur certain additional indebtedness, grant certain liens, engage in certain asset dispositions, merge or consolidate, make certain payments, distributions, investments, acquisitions or loans, materially modify certain agreements, or enter into transactions with affiliates. The Senior Credit Facility also contains affirmative covenants that are customary for credit facilities of this type. As of March 31, 2020, we were in compliance with our various covenants under the Senior Credit Facility.

The Senior Credit Facility is secured by pledges of the equity of the portion of Spark HoldCo owned by us, the equity of Spark HoldCo’s subsidiaries, the Co-Borrowers’ present and future subsidiaries, and substantially 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.


20


We are entitled to pay cash dividends to the holders of the Series A Preferred Stock and Class A common stock and will be entitled to repurchase up to an aggregate amount of 10,000,000 shares of our Class A common stock, and up to $92.7 million of Series A Preferred Stock through one or more normal course open market purchases through NASDAQ so long as: (a) no default exists or would result therefrom; (b) the Co-Borrowers are in pro forma compliance with all financial covenants before and after giving effect thereto; and (c) the outstanding amount of all loans and letters of credit does not exceed the borrowing base limits.

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, certain events of bankruptcy, certain events under ERISA, material judgments in excess of $5.0 million, certain events with respect to material contracts, and actual or asserted failure of any guaranty or security document supporting the Senior Credit Facility to be in full force and effect. A default will also occur if at any time W. Keith Maxwell III ceases to, directly or indirectly, own at least 13,600,000 Class A and Class B shares on a combined basis (to be adjusted for any stock split, subdivisions or other stock reclassification or recapitalization), and a controlling percentage of the voting equity interest of the Company, and certain other changes in 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.

Subordinated Debt Facility

In June 2019, the Company entered into an Amended and Restated Subordinated Promissory Note in the principal amount of up to $25.0 million (the “Subordinated Debt Facility”), by and among the Company, Spark HoldCo and Retailco. The Subordinated Debt Facility amended and restated the Subordinated Promissory Note, dated as of December 27, 2016, by and among the Company, Spark HoldCo and Retailco, solely to extend the expiration date from July 1, 2020 to December 31, 2021.

The Subordinated Debt Facility allows us to draw advances in increments of no less than $1.0 million per advance up to the maximum principal amount of the Subordinated Debt Facility. Advances thereunder accrue interest at 5% per annum from the date of the advance. We have the right to capitalize interest payments under the Subordinated Debt Facility. The Subordinated Debt Facility is subordinated in certain respects to our Senior Credit Facility pursuant to a subordination agreement. We may pay interest and prepay principal on the Subordinated Debt Facility so long as we are in compliance with the covenants under our Senior Credit Facility, are not in default under the Senior Credit Facility and have minimum availability of $5.0 million under the borrowing base under the Senior Credit Facility. Payment of principal and interest under the Subordinated Debt Facility is accelerated upon the occurrence of certain change of control or sale transactions.

As of March 31, 2020, and December 31, 2019, there was zero outstanding under the Subordinated Debt Facility.
10. 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 the credit standing of counterparties involved and the impact of credit enhancements.
We apply fair value measurements to our commodity derivative instruments and contingent payment arrangements based on the following fair value hierarchy, which prioritizes the inputs to the 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.

21


Level 2—Inputs other than quoted prices recorded in Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means. Instruments categorized in Level 2 primarily include non-exchange traded derivatives such as over-the-counter commodity forwards and swaps and options.
Level 3—Unobservable inputs for the asset or liability, including situations where there is little, if any, observable market activity for the asset or liability.

As the fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3), the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. These levels can change over time. 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 tables present assets and liabilities measured and recorded at fair value in our condensed consolidated balance sheets on a recurring basis by and their level within the fair value hierarchy (in thousands):

Level 1

Level 2

Level 3

Total
March 31, 2020
 

 

 

 
Non-trading commodity derivative assets
$


$
15


$


$
15

Trading commodity derivative assets







Total commodity derivative assets
$


$
15


$


$
15

Non-trading commodity derivative liabilities
$


$
(28,282
)

$


$
(28,282
)
Trading commodity derivative liabilities







Total commodity derivative liabilities
$


$
(28,282
)

$


$
(28,282
)


Level 1

Level 2

Level 3

Total
December 31, 2019







Non-trading commodity derivative assets
$


$
401


$


$
401

Trading commodity derivative assets


169




169

Total commodity derivative assets
$


$
570


$


$
570

Non-trading commodity derivative liabilities
$
(1,666
)

$
(18,772
)

$


$
(20,438
)
Trading commodity derivative liabilities







Total commodity derivative liabilities
$
(1,666
)

$
(18,772
)

$


$
(20,438
)
We had no transfers of assets or liabilities between any of the above levels during the three months ended March 31, 2020 and the year ended December 31, 2019.
Our derivative contracts include exchange-traded contracts valued utilizing readily available quoted market prices and non-exchange-traded contracts valued using market price quotations available through brokers or over-the-counter and on-line exchanges. In addition, in determining the fair value of our derivative contracts, we apply a credit risk valuation adjustment to reflect credit risk, which is calculated based on our or the counterparty’s historical credit risks. As of March 31, 2020 and December 31, 2019, the credit risk valuation adjustment was a reduction of derivative liabilities, net of $0.6 million and $0.2 million, respectively.

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11. Income Taxes

Income Taxes

We and our subsidiaries, CenStar and Verde Energy USA, Inc. ("Verde Corp"), are each subject to U.S. federal income tax as corporations. CenStar and Verde Corp file consolidated tax returns in jurisdictions that allow combined reporting. Spark HoldCo and its subsidiaries, with the exception of CenStar and Verde Corp, are treated as flow-through entities for U.S. federal income tax purposes and, as such, are generally not subject to U.S. federal income tax at the entity level. Rather, the tax liability with respect to their taxable income is passed through to their members or partners. Accordingly, we are subject to U.S. federal income taxation on our allocable share of Spark HoldCo’s net U.S. taxable income.

In our financial statements, we report federal and state income taxes for our share of the partnership income attributable to our ownership in Spark HoldCo and for the income taxes attributable to CenStar and Verde Corp. Net income attributable to non-controlling interest includes the provision for income taxes related to CenStar and Verde Corp.

We account for income taxes using the asset and liability 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 the tax bases of the assets and liabilities. We apply existing tax law and the tax rate that we expect 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. A valuation allowance is recorded when it is not more likely than not that some or all of the benefit from the deferred tax asset will be realized.

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, our deferred tax liabilities, the overall business environment, our historical earnings and losses, current industry trends, and our outlook for future years. We believe it is more likely than not that our deferred tax assets will be utilized, and accordingly have not recorded a valuation allowance on these assets.

As of March 31, 2020, we had a net deferred tax asset of $30.3 million, of which approximately $15.6 million related to the original step up in tax basis resulting from the initial purchase of Spark HoldCo units from NuDevco Retail and NuDevco Retail Holdings (predecessor to Retailco) in connection with our initial public offering.

The effective U.S. federal and state income tax rate for the three months ended March 31, 2020 and 2019 was 16.1% and 27.5%, respectively. The effective tax rate for the three months ended March 31, 2020 reflects the corporate U.S. federal statutory tax rate of 21%, applied to the mix of earnings between corporate and partnership income, offset by the tax effect of Series A Preferred Stock dividends. Total income tax expense for the three months ended March 31, 2020 differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income primarily due to state taxes and the impact of permanent differences between book and taxable income, most notably the income attributable to non-controlling interests. The effective tax rate includes a rate benefit attributable to the fact that Spark HoldCo operates as a limited liability company treated as a partnership for federal and state income tax purposes and is not subject to federal and state income taxes. Accordingly, the portion of earnings attributable to non-controlling interest is subject to tax when reported as a component of the non-controlling interest’s taxable income.
12. Commitments and Contingencies


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From time to time, we may be involved in legal, tax, regulatory and other proceedings in the ordinary course of business. Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.

Legal Proceedings

Below is a summary of our currently pending material legal proceedings. We are subject to lawsuits and claims arising in the ordinary course of our business. The following legal proceedings are in various stages and are subject to substantial uncertainties concerning the outcome of material factual and legal issues. Accordingly, unless otherwise specifically noted, we cannot currently predict the manner and timing of the resolutions of these legal proceedings or estimate a range of possible losses or a minimum loss that could result from an adverse verdict in a potential lawsuit. While the lawsuits and claims are asserted for amounts that may be material should an unfavorable outcome occur, management does not currently expect that any currently pending matters will have a material adverse effect on our financial position or results of operations.

Consumer Rate Lawsuits

Similar to other energy service companies ("ESCOs") operating in the industry, from time-to-time, the Company is subject to several class action lawsuits in various jurisdictions where the Company sells natural gas and electricity, such actions alleging consumers paid higher rates than they would have if they stayed with the default utility.

Janet Rolland, et al v. Spark Energy, LLC is a purported class action originally filed on April 19, 2017 in the United States District Court for the District of New Jersey alleging that Spark Energy, LLC charged a variable rate that was higher than permitted by its terms of service, resulting in breach of contract and violation of the duty of good faith and fair dealing. Plaintiffs alleged claims under the New Jersey Consumer Fraud Act and Illinois Consumer Fraud and Deceptive Business Practices Act. The case seeks to certify a putative nationwide class of all Spark variable rate electricity customers from April 19, 2011 to the present. The relief sought includes unspecified actual damages, refunds, treble damages and punitive damages for the putative class, injunctive relief, attorneys’ fees and costs of suit. Spark obtained dismissal with prejudice of the New Jersey Consumer Fraud Act claim and has sought dismissal of the Illinois Consumer Fraud and Deceptive Business Practices Act claim and other claims. Discovery is ongoing in this matter. In April 2020, the Judge granted a 75 day stay order to allow the parties to work on mediation. The Company will participate in mediation to see if there is a cost-efficient way to settle this matter; however, Spark denies the allegations asserted by Plaintiffs and intends to vigorously defend this matter. Given the ongoing discovery and current stage of this matter, we cannot predict the outcome of this case at this time.

Katherine Veilleux, et. al. v. Electricity Maine LLC, Provider Power, LLC, Spark HoldCo, LLC, Kevin Dean, and Emile Clavet is a purported class action lawsuit filed on November 18, 2016 in the United States District Court of Maine, alleging that Electricity Maine, LLC ("Electricity Maine"), an entity acquired by Spark Holdco in mid-2016, enrolled customers and conducted advertising, and promotions not in compliance with law. Plaintiffs seek damages for themselves and the purported class, injunctive relief, restitution, and attorneys' fees. The parties have presented a settlement agreement for preliminary approval to the court, which we expect the court to review in second quarter of 2020.

Jurich v. Verde Energy USA, Inc. is a class action originally filed on March 3, 2015 in the United States District Court for the District of Connecticut and subsequently re-filed on October 8, 2015 in the Superior Court of Judicial District of Hartford, State of Connecticut. The Amended Complaint asserts that the Verde Companies charged rates in violation of its contracts with Connecticut customers and alleges (i) violation of the Connecticut Unfair Trade Practices Act, Conn. Gen. Stat. §§ 42-110a et seq., and (ii) breach of the covenant of good faith and fair dealing. Plaintiffs are seeking unspecified actual and punitive damages for the class and injunctive relief. As part of an agreement in connection with the acquisition of the Verde Companies, the original owners of the Verde Companies are handling this matter. The parties have reached a class settlement in this matter, which received final court approval, and an order of dismissal on February 24, 2020. Settlement claims’ administration is continuing. The Company believes it has full indemnity coverage, net of tax benefit, for any actual exposure in this case at this time.

24



Telemarketing Lawsuits

Similar to other ESCOs operating in the industry, from time-to-time, the Company is subject to class actions in various jurisdictions where the Company sells energy, such actions alleging consumers received calls in violation of federal and/or state telemarketing laws.

Albrecht v. Oasis Power, LLC is a putative nationwide class action that was filed on February 12, 2018 in the United States District Court for the Northern District of Illinois, alleging that Oasis made illegal prerecorded telemarketing calls, including auto-dialed calls, to consumers’ mobile phones, in violation of the Telephone Consumer Protection Act ("TCPA") and the Illinois Automatic Telephone Dialers Act ("ATDA"). Plaintiff sought an injunction requiring Oasis to cease all unsolicited calling activities, an award of statutory and trebled damages under the TCPA and the ATDA, as well as costs and attorney’s fees. The parties have reached a class settlement on behalf of Oasis and other affiliated brands in the amount of $7.0 million, which received final court approval on February 6, 2020. Settlement claims’ administration has commenced and is continuing.

Richardson et. al. v. Verde Energy USA, Inc. is a purported class action filed on November 25, 2015 in the United States District Court for the Eastern District of Pennsylvania alleging that the Verde Companies violated the Telephone Consumer Protection Act ("TCPA") by placing marketing calls using an automatic telephone dialing system ("ATDS") or a prerecorded voice to the purported class members’ cellular phones without prior express consent and by continuing to make such calls after receiving requests for the calls to cease. Following discovery and dispositive motions, the Verde Companies received a favorable ruling on summary judgment with the court agreeing with the Verde Companies that the call system used in this case was not an ATDS as defined by the TCPA. Plaintiffs subsequently amended their petition eliminating their ATDS claim and including a class based on failure to comply with the National Do Not Call registry. As part of an agreement in connection with the acquisition of the Verde Companies, the original owners of the Verde Companies are handling this matter. The parties reached a settlement in this matter. On January 17, 2020, the court approved the Parties’ preliminary settlement and settlement claims’ administration has commenced. Final court approval is scheduled for May 27, 2020.

Corporate Matter Lawsuits

Saul Horowitz, as Sellers’ Representative for the former owners of the Major Energy Companies v. National Gas & Electric, LLC ("NG&E") and Spark Energy, Inc., is a lawsuit filed on October 17, 2017 in the United States District Court for the Southern District of New York asserting claims of fraudulent inducement against NG&E, breach of contract against NG&E and Spark, and tortious interference with contract against Spark related to a membership interest purchase agreement, subsequent dropdown, and associated earnout agreements with the Major Energy Companies' former owners. The relief sought includes unspecified compensatory and punitive damages, prejudgment and post-judgment interest, and attorneys’ fees. This case went to trial during the first two weeks of March 2020 and all material has been submitted to the Judge for his decision. Given the trial was in Manhattan, New York, which has been under a shelter-in-place order, we are not able to predict when we receive a final decision on this matter. Spark and NG&E deny the allegations asserted by Plaintiffs have vigorously defended this matter; however, we cannot predict the outcome or consequences of this case at this time.

Regulatory Matters

Many state regulators have increased scrutiny on retail energy providers, across all industry providers. We are subject to regular regulatory inquiries and preliminary investigations in the ordinary course of our business. Below is a summary of our currently pending material state regulatory matters. The following state regulatory matters are in various stages and are subject to substantial uncertainties concerning the outcome of material factual and legal issues. Accordingly, we cannot currently predict the manner and timing of the resolution of these state regulatory matters or estimate a range of possible losses or a minimum loss that could result from an adverse action.

25


Management does not currently expect that any currently pending state regulatory matters will have a material adverse effect on our financial position or results of operations.

Connecticut. Spark Energy, LLC ("SE LLC") has been working with the Connecticut Public Utilities Regulatory Authority ("PURA") regarding compliance with requirements implemented in 2016 that customer bills include any changes to existing rates effective for the next billing cycle. SE LLC and other ESCOs in Connecticut have agreed to submit to a proceeding offering amnesty to ESCOs that self-report violations and offer to voluntarily remit refunds to customers. Spark has remitted its report of potential customers who would be eligible for refunds under the amnesty program and submitted its confidential settlement proposal along with SE LLC’s commitment, subject to certain conditions. PURA has completed its review and audit and issued a final decision on March 31, 2020 regarding SE LLC’s amnesty payment, which SE LLC will comply with and pay in May 2020.

Illinois, Spark Energy, LLC received a verbal inquiry from the Illinois Commerce Commission ("ICC") and the Illinois Attorney General ("IAG") on January 1, 2020 seeking to understand an increase in complaints from Illinois consumers. The Company met with the ICC and the IAG in February 2020 and plan to discuss a compliance plan to ensure its sales are in compliance with Illinois regulations. The parties also discussed possible restitution payments to any customers impacted by sales not in compliance with Illinois regulations. The Company is currently working with both regulators on this matter.

Maine. In early 2018, Staff of the Maine Public Utilities Commission (“Maine PUC”) issued letters to Electricity Maine seeking information about customer complaints principally associated with door-to-door (“D2D”) sales practices. In late July 2018, the Maine PUC issued an Order to Show Cause and Electricity Maine responded in mid-August 2018. The Commission scheduled a procedural conference in early 2019 that resulted in no intervenors other than participation as a party by the Maine Office of Public Advocate. At the conference, the parties agreed on a procedural schedule, including a one-day evidentiary hearing. Following post-hearing discovery, Initial and Reply Briefs were filed on August 30, 2019 and September 10, 2019, respectively. The Maine PUC hearing examiner released its report in April 2020 alleging failures of compliance related to enrollment and marketing practices by Electricity Maine. The Company agreed that the best resolution to this matter was a $1.0 million settlement, to be paid over a two-year period, which will provide consumer relief and assistance for those who have energy needs related to the COVID-19 pandemic. This settlement is pending approval by the PUC.

New York. Prior to the purchase of Major Energy by the Company, in 2015, Major Energy Services, LLC and Major Energy Electric Services were contacted by the Attorney General, Bureau of Consumer Frauds & Protection for State of New York relating to their marketing practices. Major Energy has exchanged information in response to various requests from the Attorney General. The parties are in settlement negotiations at this time. While investigations of this nature may be resolved in a manner that allows the retail energy supplier to continue operating in New York with stipulations, there can be no assurances that the New York Attorney General will not take more severe action.

Ohio. Verde Energy USA Ohio, LLC (“Verde Ohio”) was the subject of a formal investigation by the Public Utilities Commission of Ohio (“PUCO”) initiated on April 16, 2019. The investigation asserted that Verde Ohio may have violated Ohio’s retail energy supplier regulations. Verde Ohio voluntary suspended door-to-door marketing in Ohio in furtherance of settlement negotiations with the PUCO Staff. On September 6, 2019, Verde Ohio and PUCO Staff executed and filed with PUCO a Joint Stipulation and Recommendation for PUCO’s review and approval, which sets forth agreed settlement terms, which includes a $1.7 million in refunds to customers and a penalty of $0.7 million. The settlement approved by PUCO on February 26, 2020, and the Joint Stipulation and Recommendation resolves all of the issues raised in the investigation. The parties are working together to agree on the process of providing refunds to customers. The Ohio Officer of Consumer Counsel has contested this settlement, and has initiated discovery requests to Verde Ohio as well as contesting Verde Ohio’s license renewal.
In addition, in September of 2019, the Ohio Attorney General (“OAG”) alleged that Verde Ohio had violated its Consumer Sales Practice Act and Do Not Call regulations. Verde Ohio is cooperating and responding to the OAG’s document requests; however, at this time, the Company cannot predict the outcome of this matter.


26


Pennsylvania. Verde Energy USA, Inc. (“Verde”) is the subject of a formal investigation by the Pennsylvania Public Utility Commission, Bureau of Investigation and Enforcement (“PPUC”) initiated on January 30, 2020. The investigation asserts that Verde may have violated Pennsylvania retail energy supplier regulations. The Company met with the PPUC in February 2020 to discuss the matter and work with the PPUC cooperatively. The Company has provided a settlement term sheet to the PPUC and the parties are working cooperatively together on a resolution and settlement; however, currently, the Company cannot predict the outcome at this time.

Indirect Tax Audits

We are undergoing various types of indirect tax audits spanning from years 2013 to 2019 for which we may have additional liabilities arise. At the time of filing these condensed consolidated financial statements, these indirect tax audits are at an early stage and subject to substantial uncertainties concerning the outcome of audit findings and corresponding responses.

As of March 31, 2020 and December 31, 2019, we had accrued $23.8 million and $29.2 million, respectively, related to litigation and regulatory matters and $2.1 million and $1.8 million, respectively, related to indirect tax audits. The outcome of each of these may result in additional expense.
13. Transactions with Affiliates
Transactions with Affiliates

We enter into transactions with and pay 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. We also sell and purchase natural gas and electricity with affiliates. We present receivables and payables with the same affiliate on a net basis in the condensed consolidated balance sheets as all affiliate activity is with parties under common control. Affiliated transactions include certain services to the affiliated companies associated with employee benefits provided through our benefit plans, insurance plans, leased office space, administrative salaries, due diligence work, recurring management consulting, and accounting, tax, legal, or technology services. Amounts billed are based on the services provided, departmental usage, or headcount, which are considered reasonable by management. As such, the accompanying condensed consolidated financial statements include costs that have been incurred by us and then directly billed or allocated to affiliates, as well as costs that have been incurred by our affiliates and then directly billed or allocated to us, and are recorded net in general and administrative expense on the condensed consolidated statements of operations with a corresponding accounts receivable—affiliates or accounts payable—affiliates, respectively, recorded in the condensed consolidated balance sheets. Transactions with affiliates for sales or purchases of natural gas and electricity are recorded in retail revenues, retail cost of revenues, and net asset optimization revenues in the condensed consolidated statements of operations with a corresponding accounts receivable—affiliate or accounts payable—affiliate are recorded in the condensed consolidated balance sheets.
Cost Allocations

Where costs incurred on behalf of the affiliate or us cannot be determined by specific identification for direct billing, the costs are allocated to the affiliated entities or us based on estimates of percentage of departmental usage, wages or headcount. The total net amount direct billed and allocated (to)/from affiliates was $(0.2) million and less than $0.1 million for the three months ended March 31, 2020 and 2019, respectively.

Accounts Receivable and PayableAffiliates
As of March 31, 2020 and December 31, 2019, we had current accounts receivable—affiliates of $2.9 million and $2.0 million, respectively, and current accounts payable—affiliates of $0.9 million and $1.0 million, respectively.
Revenues and Cost of RevenuesAffiliates

27


Revenues recorded in net asset optimization revenues in the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019 related to affiliated sales were $0.5 million and $1.2 million, respectively.
Cost of revenues recorded in net asset optimization revenues in the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019 related to affiliated purchases were $0.2 million and less than $0.1 million, respectively. These amounts are presented as net on the condensed consolidated statements of operations.

Distributions to and Contributions from Affiliates

During the three months ended March 31, 2020 and 2019, Spark HoldCo made distributions to affiliates of our Founder of $3.8 million and $3.8 million, respectively, for payments of quarterly distributions on their respective Spark HoldCo units. During the three months ended March 31, 2020 and 2019, Spark HoldCo also made distributions to these affiliates for gross-up distributions of $3.4 million and zero, respectively, in connection with distributions made between Spark HoldCo and Spark Energy, Inc. for payment of income taxes incurred by us.

Proceeds from Disgorgement of Stockholder Short-swing Profits

During the three months ended March 31, 2020 and 2019, we received zero and less than $0.1 million, respectively, cash for the disgorgement of stockholder short-swing profits under Section 16(b) under the Exchange Act. The amount received in 2019 was recorded as an increase to additional paid-in capital in our condensed consolidated balance sheet as of March 31, 2019.

Subordinated Debt Facility

In June 2019, we and Spark HoldCo entered into a Subordinated Debt Facility with an affiliate owned by our Founder, which allows the Company to borrow up to $25.0 million. The Subordinated Debt Facility allows us to draw advances in increments of no less than $1.0 million per advance up to the maximum principal amount of the Subordinated Debt Facility. Advances thereunder accrue interest at 5% per annum from the date of the advance. As of March 31, 2020 and December 31, 2019, there was zero in outstanding borrowings under the Subordinated Debt Facility. See Note 9 "Debt" for a further description of terms and conditions of the Subordinated Debt Facility.

Tax Receivable Agreement

Prior to July 11, 2019, we were party to a TRA with affiliates. Effective July 11, 2019, the Company entered into a TRA Termination and Release Agreement (the “Release Agreement”), which provided for a full and complete termination of any further payment, reimbursement or performance obligation of the Company, Retailco and NuDevco Retail under the TRA, whether past, accrued or yet to arise. Pursuant to the Release Agreement, the Company made a cash payment of approximately $11.2 million on July 15, 2019 to Retailco and NuDevco Retail. In connection with the termination of the TRA, Spark HoldCo made a distribution of approximately $16.3 million on July 15, 2019 to Retailco and NuDevco Retail under the Spark HoldCo Third Amended and Restated Limited Liability Company Agreement, as amended.

14. Segment Reporting
Our determination of reportable business segments considers the strategic operating units under which we make financial decisions, allocate resources and assess performance of our business. Our reportable business segments are retail electricity and retail natural gas. The retail electricity segment consists of electricity sales and transmission to residential and commercial customers. The retail natural gas segment consists of natural gas sales to, and natural gas transportation and distribution for, residential and commercial customers. Corporate and other consists of expenses and assets of the retail electricity and natural gas segments that are managed at a consolidated level such as general and administrative expenses. Asset optimization activities are also included in Corporate and other.

28


For the three months ended March 31, 2020 and 2019, we recorded asset optimization revenues of $6.4 million and $23.4 million and asset optimization cost of revenues of $6.1 million and $20.8 million, respectively, which are presented on a net basis in asset optimization revenues.
We use retail gross margin to assess the performance of our operating segments. Retail gross margin is defined as operating (loss) income plus (i) depreciation and amortization expenses and (ii) general and administrative expenses, less (i) net asset optimization (expenses) revenues, (ii) net (losses) gains on non-trading derivative instruments, and (iii) net current period cash settlements on non-trading derivative instruments. We deduct net (losses) gains on non-trading 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 these derivative instruments. Retail gross margin should not be considered an alternative to, or more meaningful than, operating income, as determined in accordance with GAAP.
Below is a reconciliation of retail gross margin to income before income tax expense (in thousands):

  
Three Months Ended March 31,
  
2020

2019
Reconciliation of Retail Gross Margin to Income before taxes



Income before income tax expense
$
11,993


$
3,786

Interest and other income
(160
)

(189
)
Interest expense
1,553


2,223

Operating income
13,386


5,820

Depreciation and amortization
8,796


12,155

General and administrative
25,676


29,476

Less:



Net asset optimization revenues
321


2,552

Net, loss on non-trading derivative instruments
(24,533
)

(19,803
)
Net, Cash settlements on non-trading derivative instruments
16,609


8,125

Retail Gross Margin
$
55,461


$
56,577



29


Financial data for business segments are as follows (in thousands):

Three Months Ended March 31, 2020
 
Retail
Electricity