Document
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, 2018
 
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, 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 (Do not check if a smaller reporting company) Smaller reporting company o
Emerging Growth Company x

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. x
    
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 13,141,349 shares of outstanding Class A common stock, 21,485,126 shares of Class B common stock and 3,707,256 shares of Series A Preferred Stock outstanding as of May 8, 2018.




PART I. FINANCIAL INFORMATION
 
 
ITEM 1. FINANCIAL STATEMENTS
 
 
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2018 AND DECEMBER 31, 2017 (unaudited)
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (unaudited)
 
 
 
 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2018 (unaudited)
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (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 3. DEFAULTS UPON SENIOR SECURITIES
 
ITEM 4. MINE SAFETY DISCLOSURES
 
ITEM 5. OTHER INFORMATION
 
ITEM 6. INDEX TO EXHIBITS
 
APPENDIX A
 
SIGNATURES
 


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PART 1. — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
SPARK ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2018 AND DECEMBER 31, 2017
(in thousands)
(unaudited)

March 31, 2018

December 31, 2017
Assets



Current assets:



Cash and cash equivalents
$
21,065


$
29,419

Accounts receivable, net of allowance for doubtful accounts of $4.4 million and $4.0 million as of March 31, 2018 and December 31, 2017, respectively
152,454


158,814

Accounts receivable—affiliates
3,063

 
3,661

Inventory
400


4,470

Fair value of derivative assets
7,965


31,191

Customer acquisition costs, net
20,181


22,123

Customer relationships, net
20,878


18,653

Prepaid assets
3,809


1,028

Deposits
28,763


7,701

Other current assets
23,254


19,678

Total current assets
281,832


296,738

Property and equipment, net
7,699


8,275

Fair value of derivative assets
262


3,309

Customer acquisition costs, net
6,698


6,949

Customer relationships, net
35,074


34,839

Deferred tax assets
30,734


24,185

Goodwill
120,154


120,154

Other assets
11,452


11,500

Total assets
$
493,905


$
505,949

Liabilities, Series A Preferred Stock and Stockholders' Equity



Current liabilities:



Accounts payable
$
61,687


$
77,510

Accounts payable—affiliates
4,050


4,622

Accrued liabilities
41,512


33,679

Fair value of derivative liabilities
12,347


1,637

Current portion of Senior Credit Facility


7,500

Current payable pursuant to tax receivable agreement—affiliates
5,937


5,937

Current contingent consideration for acquisitions
3,043


4,024

Other current liabilities
2,484


2,675

Current portion of note payable
11,332

 
13,443

Total current liabilities
142,392


151,027

Long-term liabilities:





Fair value of derivative liabilities
11,038


492

Payable pursuant to tax receivable agreement—affiliates
26,355


26,355

Long-term portion of Senior Credit Facility
106,500


117,750

Contingent consideration for acquisitions


626

Other long-term liabilities


172

Long-term portion of note payable
5,900


7,051

Total liabilities
292,185


303,473

Commitments and contingencies (Note 13)





Series A Preferred Stock, par value $0.01 per share, 20,000,000 shares authorized, 3,707,256 shares issued and outstanding at March 31, 2018 and 1,704,339 shares issued and outstanding at December 31, 2017
90,758


41,173

Stockholders' equity:





       Common Stock (1) :





Class A common stock, par value $0.01 per share, 120,000,000 shares authorized, 13,237,981 issued, and 13,138,535 outstanding at March 31, 2018 and 13,235,082 issued and 13,135,636 outstanding at December 31, 2017
132


132

Class B common stock, par value $0.01 per share, 60,000,000 shares authorized, 21,485,126 issued and outstanding at March 31, 2018 and December 31, 2017
216


216

       Additional paid-in capital
27,717


26,914

       Accumulated other comprehensive loss
(43
)

(11
)
       Retained earnings
(5,726
)

11,008

       Treasury stock, at cost, 99,446 shares at March 31, 2018 and December 31, 2017
(2,011
)

(2,011
)
       Total stockholders' equity
20,285


36,248

Non-controlling interest in Spark HoldCo, LLC
90,677


125,055

       Total equity
110,962


161,303

Total liabilities, Series A Preferred Stock and stockholders' equity
$
493,905


$
505,949

(1)    Outstanding shares of common stock reflect the two-for-one stock split, which took effect on June 16, 2017. See Note 5 "Equity" for further discussion.

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(2)    See Note 5 "Equity" for disclosure of our variable interest entity in Spark HoldCo, LLC.


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

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SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
(in thousands, except per share data)
(unaudited)

Three Months Ended March 31,

2018

2017 (1)
Revenues:



Retail revenues
$
284,001


$
196,500

Net asset optimization revenues/(expense) (2)
2,687


(193
)
Total Revenues
286,688


196,307

Operating Expenses:



Retail cost of revenues
289,876


145,761

General and administrative (3)
30,047


24,493

Depreciation and amortization
13,019


9,270

Total Operating Expenses
332,942


179,524

Operating (loss) income
(46,254
)

16,783

Other (expense)/income:



Interest expense
(2,245
)

(3,445
)
Interest and other income
201


199

Total other expenses
(2,044
)

(3,246
)
(Loss) Income before income tax (benefit) expense
(48,298
)

13,537

Income tax (benefit)/expense
(6,467
)

2,405

Net (loss) income
$
(41,831
)

$
11,132

Less: Net (loss) income attributable to non-controlling interests
(29,505
)

8,862

Net (loss) income attributable to Spark Energy, Inc. stockholders
$
(12,326
)

$
2,270

Less: Dividend on Series A preferred stock
2,027


183

Net (loss) income attributable to stockholders of Class A common stock
$
(14,353
)

$
2,087

Other comprehensive loss, net of tax:



Currency translation loss
$
(83
)

$
(49
)
Other comprehensive loss
(83
)

(49
)
Comprehensive (loss) income
$
(41,914
)

$
11,083

Less: Comprehensive (loss) income attributable to non-controlling interests
(29,556
)

8,831

Comprehensive (loss) income attributable to Spark Energy, Inc. stockholders
$
(12,358
)

$
2,252

 
 
 
 
Net (loss) income attributable to Spark Energy, Inc. per share of Class A common stock
 
 
 
       Basic
$
(1.09
)

$
0.16

       Diluted
$
(1.09
)

$
0.16






Weighted average shares of Class A common stock outstanding




       Basic
13,136


12,996

       Diluted
13,136


13,268


(1)
Financial information has been recast to include results attributable to the acquisition of Perigee Energy, LLC by an affiliate on February 3, 2017. See Notes 2 and 4, "Basis of Presentation and Summary of Significant Accounting Policies" and "Acquisitions," respectively, for further discussion.
(2)
Net asset optimization revenues (expenses) includes asset optimization revenues—affiliates of $648 and $0 for the three months ended March 31, 2018 and 2017, respectively, and asset optimization revenues—affiliates cost of revenues of $12 and $0 for the three months ended March 31, 2018 and 2017, respectively.
(3)
General and administrative expense includes general and administrative expense—affiliates of $6,400 and $7,300 for the three months ended March 31, 2018 and 2017, respectively.

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

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SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2018
(in thousands)
(unaudited)

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, 2017
13,235

21,485

(99
)
$
132

$
216

$
(2,011
)
$
(11
)
$
26,914

$
11,008

$
36,248

$
125,055

$
161,303

Stock based compensation







817


817


817

Restricted stock unit vesting
3







(14
)

(14
)

(14
)
Consolidated net loss








(12,326
)
(12,326
)
(29,505
)
(41,831
)
Foreign currency translation adjustment for equity method investee






(32
)


(32
)
(51
)
(83
)
Distributions paid to non-controlling unit holders










(4,822
)
(4,822
)
Dividends paid to Class A common stockholders








(2,381
)
(2,381
)

(2,381
)
Dividends to Preferred Stock








(2,027
)
(2,027
)

(2,027
)
Balance at March 31, 2018
13,238

21,485

(99
)
$
132

$
216

$
(2,011
)
$
(43
)
$
27,717

$
(5,726
)
$
20,285

$
90,677

$
110,962

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


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SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
(in thousands)
(unaudited)
  
Three Months Ended March 31,
  
2018

2017 (1)
Cash flows from operating activities:



Net (loss) income
$
(41,831
)

$
11,132

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



Depreciation and amortization expense
11,632


8,204

Deferred income taxes
(6,549
)

(87
)
Stock based compensation
1,131


1,367

Amortization of deferred financing costs
295


248

Change in Fair Value of Earnout liabilities


711

Accretion on fair value of Earnout liabilities


1,226

Bad debt expense
2,423


356

Loss on derivatives, net
36,542


21,796

Current period cash settlements on derivatives, net
16,442


(6,178
)
Accretion of discount to convertible subordinated notes to affiliate


1,004

Payment of the Major Energy Companies Earnout


(1,104
)
Other
(248
)

6

Changes in assets and liabilities:



Decrease in accounts receivable
9,737


3,738

Decrease (Increase) in accounts receivable—affiliates
354


(55
)
Decrease in inventory
4,070


3,322

Increase in customer acquisition costs
(4,274
)

(7,690
)
Increase in prepaid and other current assets
(22,719
)

(1,302
)
Increase in other assets
(58
)


Decrease in accounts payable and accrued liabilities
(9,091
)

(8,979
)
Decrease in accounts payable—affiliates
(572
)

(1,684
)
Decrease in other current liabilities
(6,653
)

(2,413
)
Decrease in other non-current liabilities
(171
)

(324
)
Net cash (used in) provided by operating activities
(9,540
)

23,294

Cash flows from investing activities:



Purchases of property and equipment
(754
)

(112
)
Acquisition of HIKO
(15,041
)


Net cash used in investing activities
(15,795
)

(112
)
Cash flows from financing activities:



Proceeds from issuance of Series A Preferred Stock, net of issuance costs paid
48,490


38,607

Borrowings on notes payable
83,800


5,625

Payments on notes payable
(102,550
)

(46,993
)
Payment of the Major Energy Companies Earnout
(1,607
)

(6,299
)
Payment of the Provider Companies Earnout and installment consideration


(2,097
)
Payments on the Verde promissory note
(3,261
)


Proceeds from disgorgement of stockholders short-swing profits
244


666

Payment of dividends to Class A common stockholders
(2,381
)

(2,355
)
Payment of distributions to non-controlling unitholders
(4,822
)

(4,347
)
Payment of Dividends to Preferred Stock
(932
)


Net cash provided by (used in) financing activities
16,981


(17,193
)
(Decrease) increase in Cash and cash equivalents
(8,354
)

5,989

Cash and cash equivalents—beginning of period
29,419


18,960

Cash and cash equivalents—end of period
$
21,065


$
24,949

Supplemental Disclosure of Cash Flow Information:



Non-cash items:





        Property and equipment purchase accrual
$
180


$
76

Cash paid during the period for:



Interest
$
1,854


$
888

Taxes
$
1,268


$
118

(1) Financial information has been recast to include results attributable to the acquisition of Perigee Energy, LLC by an affiliate on February 3, 2017. See Notes 2 and 4, "Basis of Presentation and Summary of Significant Accounting Policies" and "Acquisitions," respectively, for further discussion.


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

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

Spark Energy, Inc. ("Spark Energy," “Company,” "we" or "us") 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 common stock in each of Spark Energy, LLC (“SE”), Spark Energy Gas, LLC (“SEG”), Oasis Power Holdings, LLC ("Oasis"), CenStar Energy Corp. ("CenStar"), Electricity Maine, LLC, Electricity N.H., LLC and Provider Power Mass, LLC (collectively, the "Provider Companies"); Major Energy Services, LLC, Major Energy Electric Services, LLC, and Respond Power, LLC (collectively, the "Major Energy Companies"), Perigee Energy, LLC ("Perigee"), the Verde Companies (as defined below), and HIKO Energy, LLC ("HIKO"), 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.

Verde Energy USA, Inc.; Verde Energy USA Commodities, LLC; Verde Energy USA Connecticut, LLC; Verde Energy USA DC, LLC; Verde Energy USA Illinois, LLC; Verde Energy USA Maryland, LLC; Verde Energy USA Massachusetts, LLC; Verde Energy USA New Jersey, LLC; Verde Energy USA New York, LLC; Verde Energy USA Ohio, LLC; Verde Energy USA Pennsylvania, LLC; Verde Energy USA Texas Holdings, LLC; Verde Energy USA Trading, LLC; and Verde Energy Solutions, LLC (collectively, the “Verde Companies”) operate as retail energy providers and were formed on various dates from December 27, 2007 to November 13, 2014. We acquired the Verde Companies on July 1, 2017, as described in Note 4 "Acquisitions."

Relationship with our Founder and Majority Shareholder
W. Keith Maxwell, III (our "Founder") is the owner of a majority in 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.

Emerging Growth Company Status

As a company with less than $1.07 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” until as late as the last day of the Company's 2019 fiscal year, or until the earliest of: (i) the last day of the fiscal year in which the Company has $1.07 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); or (iii) the date on which the Company issues more than $1.0 billion of non-convertible debt over a three-year period.
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.

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Exchange and Registration Rights

The Spark HoldCo Third Amended and Restated Limited Liability Company Agreement provides that if the Company issues a new share of Class A common stock, par value $0.01 per share (the "Class A common stock"), Series A Preferred Stock (as defined below) or other equity security of the Company (other than shares of Class B common stock, par value $0.01 per share ("Class B common stock"), and excluding issuances of Class A common stock upon an exchange of Class B common stock or Series A Preferred Stock), Spark HoldCo will concurrently issue a corresponding 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, Series A Preferred Stock or such other equity security. As a result, the number of Spark HoldCo units held by the Company always equals the number of shares of Class A common stock, Series A Preferred Stock or such other equity securities of the Company outstanding.

Each share of Class B common stock, all of which are held by NuDevco Retail and Retailco, has no economic rights but entitles the holder to one vote on all matters to be voted on by stockholders generally. Holders of 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.

NuDevco Retail and Retailco have the right to exchange (the “Exchange Right”) all or a portion of their 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 Retail and Retailco have the right, under certain circumstances, to cause the Company to register the offer and resale of NuDevco Retail's and Retailco's shares of Class A common stock obtained pursuant to the Exchange Right.

2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying interim unaudited condensed 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"). This information should be read in conjunction with our consolidated financial statements and notes contained in our annual report on Form 10-K for the year ended December 31, 2017. The Company's 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.
The preparation of the Company's 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. 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 that are, in the opinion of management, necessary for a fair presentation of the condensed consolidated financial statements. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the full year or for any interim period.

Transactions with Affiliates
The Company enters into transactions with, and pays certain costs on behalf of, affiliates that are commonly controlled by W. Keith Maxwell III, and these affiliates enter into transactions with, and pay certain costs on behalf

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of us, in order to reduce risk, reduce administrative expense, create economies of scale, create strategic alliances and supply goods and services.
These transactions include, but are not limited to, certain services to the affiliated companies associated with employee benefits provided through the Company’s benefit plans, insurance plans, leased office space, administrative salaries for management due diligence work, recurring management consulting, and 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 consolidated financial statements include costs that have been incurred by the Company and then directly billed or allocated to affiliates, and 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. 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 consolidated statements of operations with a corresponding accounts receivable—affiliate or accounts payable—affiliate in the condensed consolidated balance sheets. The allocations and related estimates and assumptions are described more fully in Note 14 "Transactions with Affiliates."

Presentation of the Acquisition of Perigee Energy, LLC

On February 3, 2017, NG&E completed the acquisition of 100% of the membership interests of Perigee. On April 1, 2017, the Company and Spark HoldCo completed the purchase of all of the outstanding membership interests of Perigee from NG&E. As the acquisition of Perigee was a transfer of equity interest of entities under common control, the Company's historical financial statements for the three months ended March 31, 2017 have been recast in this Form 10-Q to include the results attributable to Perigee from February 3, 2017. The unaudited condensed consolidated financial statements for this recast period have been prepared from Perigee's historical cost-basis and may not necessarily be indicative of the actual results of operations that would have occurred had the Company owned Perigee 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 consolidated financial statements. See Note 16 "Subsequent Events" for further discussion.

Recent Accounting Pronouncements

Standards adopted in 2018

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The Company adopted the new standard effective January 1, 2018 utilizing the full retrospective approach. The adoption of the new standard resulted in no impact to our total revenues and operating income for the years ended December 31, 2017 and 2016, since our contracts with customers identify the delivery of products and services that are individually distinct performance obligations and revenue is recognized when performance obligations are satisfied. As a result, receivable balances related to revenue, including amounts related to unbilled revenue, are reflected as accounts receivable in the condensed consolidated balance sheets. Other than accounts receivable, revenue related contract assets and liabilities are immaterial.

The standard requires expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. See Note 3 "Revenues" for further disclosure.


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The Company’s asset optimization activities meet the definition of trading activities per FASB ASC Topic 815, Derivatives and Hedging, and are therefore excluded from the scope of Revenue from Contracts with Customers (Topic 606).

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 provides guidance on the presentation and classification of cash flow issues in the statement of cash flows. This ASU has been applied using a retrospective transition method for each period presented. The Company adopted ASU 2016-15 effective January 1, 2018 and resulted in the reclassification of contingent consideration payments made after a business combination as cash outflows for operating and financing activities on a retrospective basis. Because of the change in accounting guidance, we reclassified acquisition related payments of approximately $1.1 million from cash flows from investing activities to cash flows from operating activities for the three months ended March 31, 2017. We reclassified acquisition related payments of approximately $8.4 million from cash flows from investing activities to cash flows from financing activities for the three months ended March 31, 2017.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods and is to be applied prospectively to transactions on or after the adoption date. The Company adopted ASU 2017-01 effective January 1, 2018, and applied the guidance in the evaluation of whether the HIKO acquisition should be accounted for as an acquisition of assets or a business.

Standards Being Evaluated/Standards Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 amends the existing accounting standards for lease accounting by requiring entities to include substantially all leases on the balance sheet by requiring the recognition of right-of-use assets and lease liabilities for all leases. Entities may elect to not recognize leases with a maximum possible term of less than 12 months. For lessees, a lease is classified as finance or operating and the asset and liability are initially measured at the present value of the lease payments. For lessors, accounting for leases is largely unchanged from previous guidance. ASU 2016-02 also requires qualitative disclosures along with certain specific quantitative disclosures for both lessees and lessors. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and are effective for interim periods in the year of adoption. The ASU should be applied using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in this update, an entity should perform its annual or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 should be applied on a prospective basis and is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.

3. Revenues
Significant accounting policy

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The Company’s revenues are derived primarily from the sale of natural gas and electricity to retail customers. The Company also records revenue from sales of natural gas and electricity to wholesale counterparties, including affiliates.

Revenue is measured based on consideration specified in a contract with a retail customer or wholesale counterparty, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer, therefore revenue is recognized when natural gas or electricity is delivered. Similarly, cost of revenues is recognized when the commodity is delivered.

The Company records gross receipts taxes on a gross basis in retail revenues and retail cost of revenues. During the three months ended March 31, 2018 and 2017, the Company’s retail revenues included gross receipts taxes of $2.4 million and $1.4 million, respectively. During the three months ended March 31, 2018 and 2017, the Company’s retail cost of revenues included gross receipts taxes of $2.8 million and $2.3 million, respectively.

Sales tax, which represents taxes assessed by individual state and local governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, is excluded from revenue.

Nature of goods sold

The following is a description of principal activities - separated by reportable segments - from which the Company generates its revenue. For more detailed information about reportable segments, see Note 15 "Segment Reporting."

Retail Natural Gas Segment

Revenues for natural gas sales are recognized under the accrual method when the Company’s 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. Natural gas products may be sold as fixed-price or variable-price products. The typical length of a contract to provide natural gas is 12 months. Customers are billed and pay at least monthly, based on usage. 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.

Retail Electricity Segment

Revenues for electricity sales are recognized under the accrual method when the Company’s 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 products may be sold as fixed or variable rate products. The typical length of a contract to provide electricity is 12 months. Customers are billed and pay at least monthly, based on usage. Electricity sales that have been delivered but not billed by period end are estimated. Accrued unbilled revenues are 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. Unbilled revenues are calculated by multiplying these volume estimates by the applicable rate by customer class (residential or commercial). Estimates amounts are adjusted when actual usage is known and billed.

Disaggregation of revenue


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The following table disaggregates revenue by primary geographical market, customer type, customer credit risk profile. The table also includes a reconciliation of the disaggregated revenue to revenue by reportable segment (in thousands).
 
Reportable segments
 
Three months ended March 31, 2018
 
Retail Natural Gas
 
Retail Electricity
 
Total reportable segments
 
 
 
 
 
 
 
 
 
 
 
 
Primary geographical markets (a)
 
 
 
 
 
New England
$
9,351

 
$
101,098

 
$
110,449

Mid-Atlantic
25,931

 
77,555

 
103,486

Midwest
19,258

 
17,835

 
37,093

Southwest
8,562

 
24,411

 
32,973

 
$
63,102

 
$
220,899

 
$
284,001

 
 
 
 
 

Customer type
 
 
 
 
 
Commercial
$
24,299

 
$
96,893

 
$
121,192

Residential
45,729

 
147,994

 
193,723

Unbilled revenue (b)
(6,926
)
 
(23,988
)
 
(30,914
)
 
$
63,102

 
$
220,899

 
$
284,001

 
 
 
 
 
 
Customer credit risk
 
 
 
 

POR
$
36,770

 
$
157,001

 
$
193,771

Non-POR
26,332

 
63,898

 
90,230

 
$
63,102

 
$
220,899

 
$
284,001






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Reportable segments
 
Three months ended March 31, 2017 (1)
 
Retail Natural Gas
 
Retail Electricity
 
Total reportable segments
 
 
 
 
 
 
 
 
 
 
 
 
Primary geographical markets (a)
 
 
 
 
 
New England
$
9,631

 
$
49,904

 
$
59,535

Mid-Atlantic
24,182

 
58,471

 
82,653

Midwest
16,954

 
12,184

 
29,138

Southwest
12,039

 
13,135

 
25,174

 
$
62,806

 
$
133,694

 
$
196,500

 
 
 
 
 
 
Customer type
 
 
 
 
 
Commercial
$
23,537

 
$
42,997

 
$
66,534

Residential
43,969

 
95,435

 
139,404

Unbilled revenue (b)
(4,700
)
 
(4,738
)
 
(9,438
)
 
$
62,806

 
$
133,694

 
$
196,500

 
 
 
 
 
 
Customer credit risk
 
 
 
 
 
POR
$
32,984

 
$
92,734

 
$
125,718

Non-POR
29,822

 
40,960

 
70,782

 
$
62,806

 
$
133,694

 
$
196,500

(1) Financial information has been recast to include results attributable to the acquisition of Perigee Energy, LLC by an affiliate on February 3, 2017. See Notes 2 and 4, "Basis of Presentation and Summary of Significant Accounting Policies" and "Acquisitions," respectively, for further discussion.

(a) The geographical regions noted above 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
Southwest - Arizona, California, Colorado, Florida, Nevada, and Texas.

(b) Unbilled revenue is recorded in total until actualized, at which time it is categorized between commercial customers and residential customers.
4. Acquisitions
Acquisition of HIKO
On March 1, 2018, the Company entered into a Membership Interest Purchase Agreement pursuant to which the Company acquired all of the issued and outstanding membership interests of HIKO Energy, LLC, a New York limited liability company, for a total purchase price of $6.0 million in cash, plus working capital. HIKO Energy, LLC ("HIKO") has a total of approximately 29,000 RCEs located in 42 markets in 7 states.

The acquisition of HIKO was 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, and supported by independent third-party analyses. The allocation of the purchase consideration is as follows (in thousands):

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As of March 31, 2018
Cash and restricted cash
 
309

Intangible assets - customer relationships
 
6,205

Net working capital, net of cash acquired
 
9,041

Fair value of derivative liabilities
 
(205
)
Total
 
15,350


Finalization of the Company's actual working capital adjustment with the Seller is pending as of March 31, 2018. An estimated negative working capital adjustment between the Company and the Seller of $0.4 million was recorded as of March 31, 2018 and is included in other current liabilities.

Customer relationships

The acquired customer relationships intangibles related to the HIKO are reflective of the HIKO's customer base, and 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, intangible assets, and assembled workforce. These future cash flows were then discounted using an appropriate risk-adjusted rate of return to arrive at the present value of the expected future cash flows. These customer relationships will be amortized to depreciation and amortization based on the expected future net cash flows by year.

We have not included pro forma information for HIKO acquisition because it did not have a material impact on our financial position or results of operations.

The Company’s condensed consolidated statements of operations for the three months ended March 31, 2018 included $2.7 million of revenue and $1.1 million of net income from operations related to the operations of HIKO.

Acquisition of Verde

On July 1, 2017, the Company, through CenStar, its subsidiary, completed the acquisition from Verde Energy USA Holdings, LLC (the “Seller”) of all of the outstanding membership interests and stock in the Verde Companies. Total consideration was approximately $91.2 million, of which approximately $20.8 million represented positive net working capital. The Company funded the closing consideration of $85.8 million through: (i) approximately $6.8 million of cash on hand, (ii) approximately $15.0 million in subordinated debt from the Company's founder and majority shareholder through an existing subordinated debt facility, (iii) approximately $44.0 million in borrowings under its senior secured revolving credit facility, and (iv) the issuance by CenStar to the Seller of a promissory note in the aggregate principal amount of $20.0 million (the “Promissory Note”). In addition to the consideration paid at closing, CenStar was obligated to pay 100% of the Adjusted EBITDA earned by the Verde Companies for the 18 months following closing that exceeds certain thresholds, subject to the Verde Companies’ ability to achieve defined customer count criteria (the "Verde Earnout"). The Verde Earnout was valued at $5.4 million on the acquisition date. Upon the closing of the acquisition, the Verde Companies became restricted subsidiaries and co-borrowers under the Company's Senior Credit Facility.

The Verde Earnout was based on achievement by the Verde Companies of certain performance targets over the 18 month period following the closing of the acquisition of the Verde Companies. The Company and the Seller agreed to terminate the Verde Earnout on January 12, 2018, and settled the obligation with the issuance of a $5.9 million promissory note payable to the Seller in June 2019 (the “Verde Earnout Termination Note”). See discussion of the Verde Earnout Termination Note in Note 9 "Debt."


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The acquisition of the Verde Companies was 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, and 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):

 
 
 
As of March 31, 2018
Cash and restricted cash
 
 
$
1,653

Property and equipment
 
 
4,560

Intangible assets - customer relationships
 
 
28,700

Intangible assets - trademarks
 
 
3,000

Goodwill
 
 
39,207

Net working capital, net of cash acquired
 
 
19,132

Deferred tax liability
 
 
(3,126
)
Fair value of derivative liabilities
 
 
(1,942
)
Total
 
 
$
91,184


Finalization of the Company's actual working capital adjustment with the Seller is pending as of March 31, 2018. An estimated positive working capital adjustment between the Company and the Seller of approximately $0.5 million was recorded as of March 31, 2018 and is included in accounts receivable.

Customer relationships

The acquired customer relationships intangibles related to the Verde Companies are reflective of the Verde Companies' customer base, and 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, intangible assets, fixed assets, and assembled workforce. These future cash flows were then discounted using an appropriate risk-adjusted rate of return to arrive at the present value of the expected future cash flows. These customer relationships were bifurcated between unhedged and hedged and will be amortized to depreciation and amortization based on the expected future net cash flows by year and expensed to retail cost of revenues based on the expected term of the underlying fixed price contract acquired in each reporting period, respectively.

Trademark

The fair value of the Verde Companies' trademark is reflective of the value associated with the recognition and reputation of the Verde Companies to target markets. The fair value of the trademark was valued using a royalty savings method under the income approach. The value is based on the savings the Company would realize from owning the trademark rather than paying a royalty for the use of that trademark. Under this approach, the Company estimated the present value of the 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. The trademark is being amortized over the estimated five-year life of the asset on a straight-line basis.

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 the Verde Companies primarily due the value of its assembled workforce, its proprietary sales channels, and access

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to new utility service territories. Goodwill recorded in connection with the acquisition of the Verde Companies is deductible for income tax purposes because the Verde Companies was an acquisition of all of the assets of the Verde Companies.

The valuation and purchase price allocation of the Verde Companies was based on a preliminary fair value analysis. The Company anticipates adjustments to the working capital amounts that are expected to be finalized prior to the measurement period's expiration.

The following unaudited pro forma revenue and earnings summary presents consolidated information of the Company as if the acquisition had occurred on January 1, 2016 (in thousands):

 
Three Months Ended March 31,
 
2017
2016
Revenues
$
233,290

$
156,571

Earnings
$
2,334

$
4,419


The pro forma results are not necessarily indicative of our consolidated results of operations in future periods or the results that actually would have been realized had the companies operated on a combined basis during the periods presented. The revenue and earnings for the three months ended March 31, 2017 and 2016 reflects actual results of operations since the financial results were fully combined during that period. The pro forma results include adjustments primarily related to amortization of acquired intangibles, and certain accounting policy alignments as well as direct and incremental acquisition related costs reflected in the historical financial statements. The preliminary purchase price allocation was used to prepare the pro forma adjustments. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments.

Acquisition of Perigee

On April 1, 2017, the Company and Spark Holdco completed the purchase of all of the outstanding membership interest of Perigee, a Texas limited liability company, with operations across 14 utilities in Connecticut, Delaware, Massachusetts, New York and Ohio. The purchase price for Perigee from NG&E was approximately $4.1 million, which consisted of a base price of $2.0 million, $0.2 million additional customer option payment, and $1.9 million in working capital, subject to adjustments.

The acquisition of Perigee by the Company and Spark HoldCo from NG&E was a transfer of equity interests of entities under common control on April 1, 2017. Accordingly, the assets acquired and liabilities assumed were based on their historical value as of April 1, 2017. NG&E acquired Perigee on February 3, 2017 and the fair value of the net assets acquired was as follows (in thousands):
 
Final as of December 31, 2017
Cash
$
23

Intangible assets - customer relationships
1,100

Goodwill
1,540

Net working capital, net of cash acquired
2,085

Fair value of derivative liabilities
(443
)
Total
$
4,305


Customer relationships

The acquired customer relationships intangibles related to Perigee are reflective of Perigee's customer base, and were valued at the respective dates of acquisition 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,

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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.

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 Perigee by NG&E primarily due to the value of Perigee's access to a new utility service territory. Goodwill recorded in connection with the acquisition of Perigee is deductible for income tax purposes because the acquisition of Perigee was an acquisition of all of the assets of Perigee.

The valuation and purchase price allocation of Perigee was based on a preliminary fair value analysis performed as of February 3, 2017, the date Perigee was acquired by NG&E.

We have not included pro forma information for Perigee acquisition because it did not have a material impact on our financial position or results of operations.

5. Equity

Non-controlling Interest

The Company holds an economic interest and is the sole managing member in Spark HoldCo, with NuDevco Retail and Retailco holding the remaining 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 retained by NuDevco Retail and Retailco as a non-controlling interest.

The Company and NuDevco Retail and Retailco owned the following economic interests in Spark HoldCo at December 31, 2017 and March 31, 2018, respectively.

Non-controlling Interest Economic Interest
 
The Company
NuDevco Retail and Retailco (1)
December 31, 2017
38.12
%
61.88
%
March 31, 2018
38.12
%
61.88
%

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

Three Months Ended March 31,

2018

2017 (1)
 


 
Net income allocated to non-controlling interest
$
(29,888
)

$
8,405

Income tax benefit allocated to non-controlling interest
(383
)

(457
)
Net income attributable to non-controlling interest
$
(29,505
)

$
8,862

(1) Financial information has been recast to include results attributable to the acquisition of Perigee Energy, LLC by an affiliate on February 3, 2017. See Notes 2 and 4, "Basis of Presentation and Summary of Significant Accounting Policies" and "Acquisitions," respectively, for further discussion.

Stock Split


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On May 22, 2017, the Company authorized and approved a two-for-one stock split of the Company's issued Class A common stock and Class B common stock, which was effected through a stock dividend (the "Stock Split"). Shareholders of record at the close of business on June 5, 2017 were issued one additional share of Class A common stock or Class B common stock of the Company for each share of Class A common stock or Class B common stock, respectively, held by such shareholder on that date. Such additional shares of Class A common stock or Class B common stock were distributed on June 16, 2017. All shares and per share amounts in this report have been retrospectively restated to reflect the Stock Split.

Share Repurchase Program

On May 24, 2017, the Company authorized a share repurchase program of up to $50.0 million of Spark Class A common stock through December 31, 2017. The Company funded the program through available cash balances, its credit facilities, and operating cash flows. The share repurchase program expired on December 31, 2017.

The Company used the cost method to account for its treasury shares. Purchases of shares of Class A common stock were recorded at cost, and the gross cost of the Class A common stock purchased was charged to a contra equity account entitled "Treasury Stock."

Class A Common Stock

The Company had a total of 13,138,535 and 13,135,636 shares of its Class A common stock outstanding at March 31, 2018 and December 31, 2017, respectively, and 99,446 shares of treasury stock at March 31, 2018 and December 31, 2017. 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 had a total of 21,485,126 shares of its Class B common stock outstanding at March 31, 2018 and December 31, 2017. Each share of Class B common stock, all of which are held by NuDevco Retail and Retailco, 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 for which there were 3,707,256 and 1,704,339 issued and outstanding shares at March 31, 2018 and December 31, 2017, respectively.

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 interest in the Company. Diluted earnings per share is similarly calculated except that the denominator is increased (1) using the treasury stock method to determine the potential dilutive effect of the Company's outstanding unvested restricted stock units and (2) using the if-converted method to determine the potential dilutive effect of the Company's Class B common stock. All shares and per share amounts in this Quarterly Report on Form 10-Q have been retrospectively restated to reflect the Stock Split.

The following table presents the computation of (loss) earnings per share for the three months ended March 31, 2018 and 2017 (in thousands, except per share data):

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Three Months Ended March 31,

2018
2017
Net (loss) income attributable to Spark Energy, Inc. stockholders
$
(12,326
)
$
2,270

Less: Dividend on Series A preferred stock
2,027

183

Net (loss) income attributable to stockholders of Class A common stock
$
(14,353
)
$
2,087

 
 
 
Basic weighted average Class A common shares outstanding
13,136

12,996

Basic (loss) earnings per share attributable to stockholders
$
(1.09
)
$
0.16




Net (loss) income attributable to stockholders of Class A common stock
$
(14,353
)
$
2,087

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


Diluted net (loss) income attributable to stockholders of Class A common stock
$
(14,353
)
$
2,087

 
 
 
Basic weighted average Class A common shares outstanding
13,136

12,996

Effect of dilutive Class B common stock


Effect of dilutive restricted stock units

272

Diluted weighted average shares outstanding
13,136

13,268




Diluted (loss) earnings per share attributable to stockholders
$
(1.09
)
$
0.16


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 inability to dissolve or otherwise remove its management. Spark HoldCo owns all of the outstanding membership interests in each of the operating subsidiaries through which the Company operates. The Company is the sole managing member of Spark HoldCo, manages Spark HoldCo's operating subsidiaries through this managing membership interest, and is considered the primary beneficiary of Spark HoldCo.

The assets of Spark HoldCo cannot be used to settle the obligations of the Company except through distributions to the Company, and the liabilities of Spark HoldCo cannot be settled by the Company 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 the Company's condensed consolidated balance sheet as of March 31, 2018 (in thousands):


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March 31, 2018
Assets

Current assets:

Cash and cash equivalents
$
21,028

Accounts receivable
152,454

Other current assets
105,895

Total current assets
279,377

Non-current assets:

Goodwill
120,154

Other assets
59,567

Total non-current assets
179,721

Total Assets
$
459,098



Liabilities

Current liabilities:

Accounts payable and Accrued Liabilities
$
103,084

Contingent consideration
3,043

Other current liabilities
30,212

Total current liabilities
136,339

Long-term liabilities:

Long-term portion of Senior Credit Facility
106,500

Other long-term liabilities
16,938

Total long-term liabilities
123,438

Total Liabilities
$
259,777


6. Preferred Stock

On March 15, 2017, the Company issued 1,610,000 shares of 8.75% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Stock ("Series A Preferred Stock"), par value $0.01 per share and liquidation preference $25.00 per share, plus accumulated and unpaid dividends, at a price to the public of $25.00 per share ($24.21 per share to the Company, net of underwriting discounts and commissions). The Company received approximately $39.0 million in net proceeds from the offering, after deducting underwriting discounts and commissions and a structuring fee. Offering expenses of $1.0 million were recorded as a reduction to the carrying value of the Series A Preferred Stock. The net proceeds from the offering were contributed to Spark HoldCo to use for general corporate purposes.

On July 21, 2017, the Company entered into an At-the-Market Issuance Sales Agreement ("the ATM Agreement") with FBR Capital Markets & Co. as sales agent (the "Agent"). Pursuant to the terms of the ATM Agreement, the Company may sell, from time to time through the Agent, the Company's Series A Preferred Stock, having an aggregate offering price of up to $50.0 million.

During the year ended December 31, 2017, the Company sold an aggregate of 94,339 shares of Series A Preferred Stock under the ATM Agreement. The Company received net proceeds of $2.4 million and paid compensation to the sales agent of less than $0.1 million with respect to these sales.

On January 23, 2018, the Company commenced a public offering of its Series A Preferred Stock pursuant to an effective shelf registration statement on Form S-3 previously filed with the SEC. The offering closed on January 26, 2018. As part of the January 2018 offering, the Company issued 2,000,000 shares of Series A Preferred Stock, plus accumulated and unpaid dividends, at a price to the public of $25.25 per share ($24.45 per share to the Company, net of underwriting discounts and commissions). The Company received approximately $48.9 million in net

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proceeds from the offering, after deducting underwriting discounts and commissions and a structuring fee. Offering expenses of $0.5 million were recorded as a reduction to the carrying value of the Series A Preferred Stock. The net proceeds from the offering were contributed to Spark HoldCo to use for general corporate purposes.

During the three months ended March 31, 2018, the Company sold an aggregate of 2,917 shares of Series A Preferred Stock under the ATM Agreement. The Company received net proceeds of $0.1 million and paid compensation to the sales agent of less than $0.1 million with respect to these sales.

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. From March 15, 2017, the Series A Preferred Stock issuance date, to, but not including, April 15, 2022, the Series A Preferred Stock will accrue dividends at an annual percentage rate of 8.75%.

The liquidation preference provisions of the Series A Preferred Stock are considered contingent redemption provisions because there are certain rights granted to the holders of the Series A Preferred Stock that are not solely within the control of the Company upon a change in control of the Company. Accordingly, the Series A Preferred Stock is presented within the mezzanine portion of the accompanying consolidated balance sheet.

The Company had a total of 3,707,256 shares of Series A Preferred Stock issued and outstanding at March 31, 2018 and 1,704,339 shares of Series A Preferred Stock issued and outstanding at December 31, 2017. During the three months ended March 31, 2018, the Company paid $0.9 million in dividends to holders of the Series A Preferred Stock. As of March 31, 2018, the Company had accrued $2.0 million related to dividends to holders of the Series A Preferred Stock. This dividend was paid on April 16, 2018.

A summary of the Company's mezzanine equity for the three months ended March 31, 2018 is as follows:

 
 
(in thousands)
Mezzanine equity at December 31, 2017
 
$
41,173

Issuance of Series A Preferred Stock, net of issuance cost
 
48,490

Accumulated dividends on Series A Preferred Stock
 
1,095

Mezzanine equity at March 31, 2018
 
$
90,758


In connection with the issuance of the Series A Preferred Stock, the Company and Spark HoldCo entered into the Third Amended and Restated Spark HoldCo Limited Liability Company Agreement to amend the prior agreement to provide for, among other things, the designation and issuance of Spark HoldCo Series A preferred units, as another equity security of Spark HoldCo to be issued concurrently with the issuance of Series A Preferred Stock by the Company, including specific terms relating to distributions by Spark HoldCo in connection with the payment by the Company of dividends on the Series A Preferred Stock, the priority of liquidating distributions by Spark HoldCo, the allocation of income and loss to the Company in connection with distributions by Spark HoldCo on Series A preferred units, and other terms relating to the redemption and conversion by the Company of the Series A Preferred Stock.

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

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Estimated useful
lives (years)
 
March 31, 2018
 
December 31, 2017
Information technology
2 – 5
 
$
34,677

 
$
34,103

Leasehold improvements
2 – 5
 
4,568

 
4,568

Furniture and fixtures
2 – 5
 
1,964

 
1,964

Building improvements
2 – 5

809


809

Total

 
42,018

 
41,444

Accumulated depreciation

 
(34,319
)
 
(33,169
)
Property and equipment—net

 
$
7,699

 
$
8,275

Information technology assets include software and consultant time used in the application, development and implementation of various systems including customer billing and resource management systems. As of March 31, 2018 and December 31, 2017, information technology includes $0.1 million and $1.2 million, respectively, of costs associated with assets not yet placed into service.
Depreciation expense recorded in the condensed consolidated statements of operations was $1.2 million and $0.5 million for the three months ended March 31, 2018 and 2017.

8. Goodwill, Customer Relationships and Trademarks
Goodwill, customer relationships and trademarks consist of the following amounts as of (in thousands):
 
March 31, 2018
December 31, 2017
Goodwill
$
120,154

$
120,154

Customer relationships - Acquired (1)


Cost
$
99,576

$
93,371

Accumulated amortization
(49,578
)
(46,681
)
Customer relationships - Acquired, net
$
49,998

$
46,690

Customer relationships - Other (2)


Cost
$
12,336

$
12,336

Accumulated amortization
(6,382
)
(5,534
)
Customer relationships - Other, net
$
5,954

$
6,802

Trademarks (3)


Cost
$
9,770

$
9,770

Accumulated amortization
(1,483
)
(1,212
)
Trademarks, net
$
8,287

$
8,558

(1) Customer relationships - Acquired represent those customer acquisitions accounted for under the acquisition method in accordance with ASC 805. See Note 4 "Acquisitions" for further discussion.
(2) Customer relationships - Other represent portfolios of customer contracts not accounted for in accordance with ASC 805 as these acquisitions were not in conjunction with the acquisition of businesses.
(3) Trademarks reflect values associated with the recognition and positive reputation of acquired businesses accounted for as part of the acquisition method in accordance with ASC 805 through the acquisitions of CenStar, Oasis, the Provider Companies, the Major Energy Companies and the Verde Companies. These trademarks are recorded as other assets in the condensed consolidated balance sheets. See Note 4 "Acquisitions" for further discussion.

Changes in goodwill, customer relationships and trademarks consisted of the following (in thousands):


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Goodwill
Customer Relationships - Acquired & Non-Compete Agreements
Customer Relationships - Others
Trademarks
Balance at December 31, 2017
$
120,154

$
46,690

$
6,802

$
8,558

Additions (HIKO)

6,205



Amortization expense

(2,897
)
(848
)
(271
)
Balance at March 31, 2018
$
120,154

$
49,998

$
5,954

$
8,287


The acquired customer relationship intangibles related to the Major Energy Companies, the Provider Companies, and the Verde Companies were bifurcated between hedged and unhedged customer contracts. The unhedged customer contracts are amortized to depreciation and amortization based on the expected future cash flows by year. The hedged customer contracts were evaluated for favorable or unfavorable positions at the time of acquisition and amortized to retail cost of revenue based on the expected term and position of the underlying fixed price contract in each reporting period. For the three months ended March 31, 2018 and 2017, approximately $1.4 million and $1.1 million, respectively, customer relationship amortization gain is included in cost of revenues.

Estimated future amortization expense for customer relationships and trademarks at March 31, 2018 is as follows (in thousands):
Year ending December 31,

2018
16,487

2019
16,135

2020
11,715

2021
10,153

2022
5,941

> 5 years
3,808

Total
$
64,239

9. Debt
Debt consists of the following amounts (in thousands):

March 31, 2018
 
December 31, 2017
Current portion of Senior Credit Facility—Bridge Loan (2)
$

 
$
7,500

Current portion of Note Payable—Verde
11,332

 
13,443

Total current debt
11,332

 
20,943

Long-term portion of Senior Credit Facility (1) (2)
106,500

 
117,750

Long-term portion of Note Payable—Verde
5,900

 
7,051

Total long-term debt
112,400

 
124,801

Total debt
$
123,732

 
$
145,744

(1) As of March 31, 2018 and December 31, 2017, the Company had $49.7 million and $47.2 million in letters of credit issued, respectively.
(2) As of March 31, 2018 and December 31, 2017, the weighted average interest rate on the Senior Credit Facility was 4.64% and 4.61%, respectively.

Deferred financing costs were $1.4 million and $1.6 million as of March 31, 2018 and December 31, 2017, respectively. Of these amounts, $1.2 million is recorded in other current assets in the condensed consolidated balance sheet as of March 31, 2018 and December 31, 2017, and $0.2 million and $0.4 million is recorded in other assets in the condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017, respectively, representing capitalized financing costs related to our Senior Credit Facility and Prior Senior Credit Facility.

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Interest expense consists of the following components for the periods indicated (in thousands):

Three Months Ended March 31,

2018
 
2017
Interest incurred on Senior Credit Facility
$
1,264

 
$
694

Accretion related to Earnouts (1)

 
1,225

Letters of credit fees and commitment fees
358

 
226

Amortization of deferred financing costs 
295

 
248

Interest incurred on convertible subordinated notes to affiliate

 
1,052

Interest incurred on subordinated debt
1

 

Interest on Verde promissory note
327

 

Interest Expense
$
2,245

 
$
3,445


(1) Includes accretion related to the Major Earnout of zero for the three months ended March 31, 2018, and accretion related to the Provider Earnout of $0.1 million and the Major Earnout of $1.1 million for the three months ended March 31, 2017.

Senior Credit Facility

On May 19, 2017 (the “Closing Date”), the Company, as guarantor, and Spark HoldCo (the “Borrower” and, together with SE, SEG, CenStar, CenStar Operating Company, LLC, Oasis, Oasis Power, LLC, the Provider Companies, the Major Energy Companies and Perigee Energy, LLC, each subsidiaries of Spark HoldCo, the “Co-Borrowers”), entered into a senior secured borrowing base credit facility (the “Senior Credit Facility”) in an aggregate amount of $120.0 million, which replaced the Prior Senior Credit Facility (defined below). The Verde Companies became Co-Borrowers upon the completion of our acquisition of the Verde Companies. On November 2, 2017, the Company and Co-Borrowers entered into an amendment to the Senior Credit Facility, which entitled the co-borrowers to elect to increase total commitments under the Senior Credit Facility to $200.0 million. In connection with any such increase in commitments, the various limits on advances for Working Capital Loans, Letters of Credit and Bridge Loans increased accordingly. On November 30, 2017, we exercised the accordion feature in the Senior Credit Facility, expanding commitments to an aggregate amount of $185.0 million. On January 11, 2018 and January 23, 2018, we exercised the accordion feature in the Senior Credit Facility for an additional $10.0 million and $5.0 million, respectively, in commitments by existing lenders. These exercises of the accordion feature of the Senior Credit Facility brought total commitments under the Senior Credit Facility to $200.0 million.

As of March 31, 2018, there was $106.5 million outstanding under the Senior Credit Facility, and there was approximately $43.8 million available borrowing capacity (which includes a $49.7 million reduction for outstanding letters of credit).

The Senior Credit Facility will mature on May 19, 2019, and all amounts outstanding thereunder will be payable on the maturity date. Borrowings under the Bridge Loan sublimit will be repaid 25% per year on a quarterly basis (or 6.25% per quarter), with the remainder due at maturity.

Subject to applicable sublimits and terms of the Senior Credit Facility, borrowings are available for the issuance of letters of credit (“Letters of Credit”), working capital and general purpose revolving credit loans up to $200.0 million (“Working Capital Loans”), and bridge loans up to $50.0 million (“Bridge Loans”) for the purpose of partial funding for acquisitions. Borrowings under the Senior Credit Facility may be used to refinance loans outstanding under the Prior Senior Credit Facility, pay fees and expenses in connection with the current 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 the Company’s Class A common stock.

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:

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the Eurodollar rate plus an applicable margin of up to 3.00% per annum (based on the prevailing utilization); or
the 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 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
the 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 will pay a commitment fee of 0.50% quarterly in arrears on the unused portion of the Senior Credit Facility. In addition, the Co-Borrowers will be 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 as follows:

Minimum Fixed Charge Coverage Ratio. Spark Energy, Inc. 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 any Subordinated Debt but including interest in respect of that certain promissory note made by CenStar Energy Corp 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 of the Company), distributions, the aggregate amount of repurchases of the Company’s Class A common stock or commitments for such purchases, taxes and scheduled amortization payments.

Maximum Total Leverage Ratio. Spark Energy, Inc. must maintain a ratio of total indebtedness (excluding eligible subordinated debt) to Adjusted EBITDA of no more than 2.00 to 1.00.

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;
materially modify certain agreements; or
enter into transactions with affiliates.

The Senior Credit Facility is secured by pledges of the equity of the portion of Spark HoldCo owned by the Company, 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.


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Table of Contents

Spark Energy, Inc. is 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 the Company’s Class A common 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, actual or asserted failure of any guaranty or security document supporting the Senior Credit Facility to be in full force and effect, failure of Nathan Kroeker to retain his position as President and Chief Executive Officer of the Company, and failure of W. Keith Maxwell III to retain his position as chairman of the board of directors. 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.

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.

Subordinated Debt Facility

On December 27, 2016, we and Spark HoldCo jointly issued to Retailco, an entity owned by our Founder, a 5% subordinated note in the principal amount of up to $25.0 million. The subordinated note allows the Company and Spark HoldCo to draw advances in increments of no less than $1.0 million per advance up to the maximum principal amount of the subordinated note. The subordinated note matures in July 2020, and advances thereunder accrue interest at 5% per annum from the date of the advance. The Company has the right to capitalize interest payments under the subordinated note. The subordinated note is subordinated in certain respects to the Company's Senior Credit Facility pursuant to a subordination agreement. The Company may pay interest and prepay principal on the subordinated note so long as it is in compliance with its covenants under the Senior Credit Facility, is not in default under the Senior Credit Facility and has minimum availability of $5.0 million under the borrowing base under the Senior Credit Facility. Payment of principal and interest under the subordinated note is accelerated upon the occurrence of certain change of control or sale transactions. As of March 31, 2018 and December 31, 2017, respectively, there were no outstanding borrowings under the subordinated note.

Verde Companies Promissory Note

In connection with the financing of the Verde Companies acquisition, on July 1, 2017, CenStar issued a Promissory Note in the aggregate principal amount of $20.0 million (the "Verde Promissory Note") for a portion of the purchase price. The Verde Promissory Note required eighteen monthly installments beginning on August 1, 2017, and accrued interest at 5% per annum from the date of issuance. The Verde Promissory Note, including principal and interest, was unsecured, but is guaranteed by the Company. Payment of principal and interest under the Verde Promissory Note was accelerated upon the occurrence of certain events of default.

On January 12, 2018, in connection with the Earnout Termination Agreement (defined below), CenStar issued to the seller of the Verde Companies an amended and restated promissory note (the “Amended and Restated Verde

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Table of Contents

Promissory Note”), which amended and restated the Verde Promissory Note. The Amended and Restated Verde Promissory Note, effective January 12, 2018, retains the same maturity date as the Verde Promissory Note. The Amended and Restated Verde Promissory Note bears interest at a rate of 9% per annum beginning January 1, 2018. Principal and interest remain payable monthly on the first day of each month in which the Amended and Restated Verde Promissory Note is outstanding. CenStar will continue to deposit a portion of each payment under the Amended and Restated Verde Promissory Note into an escrow account, which serves as security for certain indemnification claims and obligations under the purchase agreement. The amount deposited into the escrow account has been increased from the Verde Promissory Note. All principal and interest payable under the Amended and Restated Verde Promissory Note remains subject to acceleration upon the occurrence of certain events of default, including the failure to pay any principal or interest when due under the Amended and Restated Verde Promissory Note. As of December 31, 2017, there was $14.6 million outstanding under the Verde Promissory note. As of March 31, 2018, there was $11.3 million outstanding under the Amended and Restated Verde Promissory Note, which will be paid in monthly installments through January 2019.

Verde Earnout Termination Note

On January 12, 2018, we entered into an Agreement to Terminate Earnout Payments (the “Earnout Termination Agreement”) that terminates our obligation to make any required earnout payments under the purchase agreement for our acquisition of the Verde Companies in exchange for CenStar’s issuance to the seller of a promissory note in the principal amount of $5.9 million (the “Verde Earnout Termination Note”). The Verde Earnout Termination Note, effective January 12, 2018, matures on June 30, 2019 (subject to early maturity upon certain events) and bears interest at a rate of 9% per annum. CenStar is permitted to withhold amounts otherwise due at maturity related to certain indemnifiable matters under the purchase agreement for our acquisition of the Verde Companies. Interest is payable monthly on the first day of each month in which the Verde Earnout Termination Note is outstanding, beginning on its issuance date. The principal and any outstanding interest is due on June 30, 2019. All principal and interest payable under the Verde Earnout Termination Note is accelerated upon the occurrence of certain events of default, including the failure to pay any principal or interest when due under the Verde Earnout Termination Note. The Company recorded the Verde Earnout Termination Note of $5.9 million as long-term debt as of March 31, 2018 and December 31, 2017.

Prior Senior Credit Facility

The Company, as guarantor, and Spark HoldCo (together with Spark Energy, LLC, Spark Energy Gas, LLC, CenStar Energy Corp, CenStar Operating Company, LLC, Oasis, Oasis Power, LLC, Electricity Maine, LLC, Electricity N.H., LLC, and Provider Power Mass, LLC, each a subsidiary of Spark HoldCo, as co-borrowers) were party to a senior secured revolving credit facility (“Prior Senior Credit Facility”), which included a senior secured revolving working capital facility up to $82.5 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 or equity.

The Prior Senior Credit Facility had a maturity date of July 8, 2017. The outstanding balances under the Working Capital Line and the Acquisition Line were paid in full on May 19, 2017 upon execution of the Company's new Senior Credit 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 not only the credit standing of

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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. The Level 3 category includes estimated earnout obligations related to the Company's acquisitions.
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.
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 consolidated balance sheets approximate fair value due to the short-term nature of these items. The carrying amounts of the Senior Credit Facility and Prior Senior Credit Facility recorded in the condensed consolidated balance sheets approximate fair value because of the variable rate nature of the Company’s line of credit. The fair value of our convertible subordinated notes to affiliates is not determinable for accounting purposes 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 for accounting purposes due to the affiliate nature and terms of the associated agreement with the affiliate.
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 consolidated balance sheets on a recurring basis by and their level within the fair value hierarchy as of (in thousands):

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Level 1

Level 2

Level 3

Total
March 31, 2018
 

 

 

 
Non-trading commodity derivative assets
$
8


$
8,090


$


$
8,098

Trading commodity derivative assets
4


125




129

Total commodity derivative assets
$
12


$
8,215


$


$
8,227

Non-trading commodity derivative liabilities
$
(118
)

$
(22,316
)

$


$
(22,434
)
Trading commodity derivative liabilities
(912
)

(39
)



(951
)
Total commodity derivative liabilities
$
(1,030
)

$
(22,355
)

$


$
(23,385
)
Contingent payment arrangement
$

 
$

 
$
(3,043
)
 
$
(3,043
)


Level 1

Level 2

Level 3

Total
December 31, 2017







Non-trading commodity derivative assets
$
158


$
33,886


$


$
34,044

Trading commodity derivative assets


456




456

Total commodity derivative assets
$
158


$
34,342


$


$
34,500

Non-trading commodity derivative liabilities
$
(387
)

$
(950
)

$


$
(1,337
)
Trading commodity derivative liabilities
(555
)

(237
)



(792
)
Total commodity derivative liabilities
$
(942
)

$
(1,187
)

$


$
(2,129
)
Contingent payment arrangement
$

 
$

 
$
(4,650
)
 
$
(4,650
)
The Company had no transfers of assets or liabilities between any of the above levels during the three months ended March 31, 2018 and the year ended December 31, 2017.
The Company’s derivative contracts include exchange-traded contracts fair valued utilizing readily available quoted market prices and non-exchange-traded contracts fair valued using market price quotations available through brokers or over-the-counter and on-line exchanges. In addition, in determining the fair value of the Company’s derivative contracts, the Company applies a credit risk valuation adjustment to reflect credit risk, which is calculated based on the Company’s or the counterparty’s historical credit risks. As of March 31, 2018 and December 31, 2017, the credit risk valuation adjustment was not material.
The contingent payment arrangements referred to above reflect estimated earnout obligations incurred in relation to the Company's acquisitions. As of March 31, 2018 and December 31, 2017, the estimated earnout obligations were $3.0 million and $4.6 million, respectively, which related to the Major Earnout in the amount of $3.0 million and $4.6 million, respectively. The Major Stock Earnout was valued at zero at March 31, 2018 and December 31, 2017, respectively. As of March 31, 2018, the estimated earnouts are recorded on our condensed consolidated balance sheets in current liabilities—contingent consideration in the amount of $3.0 million; and as of December 31, 2017, in current liabilities—contingent consideration and long-term liabilities—contingent consideration in the amount of $4.0 million and $0.6 million, respectively.
The Provider Earnout was based on achievement by the Provider Companies of a certain customer count criteria over the nine month period following the closing of the Provider Companies acquisition on August 1, 2016. The sellers of the Provider Companies were entitled to a maximum of $9.0 million and a minimum of $5.0 million in earnout payments based on the level of customer count attained, as defined by the Provider Companies membership interest purchase agreement. In March and June 2017, the Company paid the sellers of the Provider Companies $1.0 million and $4.5 million, respectively, related to the earnout based on the achievement of certain customer count and sales targets. During the three months ended March 31, 2017, the Company recorded accretion of $0.1 million to reflect the impact of the time value of the liability prior to the final payment in June 2017. The Company revalued the liability at March 31, 2017 with no expected change of the earnout payments for the three months ended March 31, 2017. The final payment for the Provider Earnout was made in June 2017. In determining the fair value of the Provider Earnout, the Company forecasted an expected customer count and certain other related criteria

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and calculated the probability of such forecast being attained. As this calculation was based on management's estimates of the liability, we classified the Provider Earnout as a Level 3 measurement.
The Major Earnout is based on the achievement by the Major Energy Companies of certain performance targets over the 33 month period following NG&E's closing of the Major Energy Companies acquisition (i.e., April 15, 2016). The previous members of Major Energy Companies are entitled to a maximum of $20.0 million in earnout payments based on the level of performance targets attained, as defined by the Major Purchase Agreement. The Stock Earnout obligation is contingent upon the Major Energy Companies achieving the Major Earnout's performance target ceiling, thereby earning the maximum Major Earnout payments. If the Major Energy Companies earn such maximum Major Earnout payments, NG&E would be entitled to a maximum of 400,000 shares of Class B common stock (and a corresponding number of Spark HoldCo units). In determining the fair value of the Major Earnout and the Stock Earnout, the Company forecasted certain expected performance targets and calculated the probability of such forecast being attained. In March 2018 and 2017, the Company paid the previous members of the Major Energy Companies $1.6 million and $7.4 million, respectively, related to the year ended December 31, 2017 and the period from April 15, 2016 through December 31, 2016, respectively. During the three months ended March 31, 2018 and 2017, the Company recorded accretion of zero and $1.2 million, respectively, to reflect the impact of the time value of the liability. The Company revalued the liability at March 31, 2018, resulting in no change to the fair value of the liability. As this calculation is based on management's estimates of the liability, we classified the Major Earnout as a Level 3 measurement.
The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2018.
 
 
Major Earnout and Stock Earnout
Fair Value at December 31, 2017
 
$
4,650

Change in fair value of contingent consideration, net
 

Accretion of contingent earnout consideration (included within interest expense)
 

Payments and settlements
 
(1,607
)
Fair Value at March 31, 2018
 
$
3,043

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
We apply the provisions of the fair value measurement standard to our non-recurring, non-financial measurements including business combinations as well as impairment related to goodwill and other long-lived assets. For business combinations (see Note 4 "Acquisitions"), the purchase price is allocated to the assets acquired and liabilities assumed based on a discounted cash flow model for most intangibles as well as market assumptions for the valuation of equipment and other fixed assets. We utilize a discounted cash flow model in evaluating impairment considerations related to goodwill and long-lived assets. Given the unobservable nature of the inputs, the discounted cash flow models are considered to use Level 3 inputs.
11. 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.
The Company holds certain derivative instruments that are not held for trading purposes and are not designated as hedges for accounting purposes. These derivative instruments represent economic hedges that mitigate the Company’s exposure to fluctuations in commodity prices. For these derivative instruments, changes in the fair value are recognized currently in earnings in retail cost of revenues.

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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 consolidated balance sheets when the derivative instruments are executed with the same counterparty under a master netting arrangement. The Company’s derivative contracts include transactions that are executed both on an exchange and centrally cleared as well as over-the-counter, bilateral contracts that are transacted directly with a third party. To the extent the Company has paid or received collateral related to the derivative assets or liabilities, such amounts would be presented net against the related derivative asset or liability’s fair value. As of March 31, 2018 and December 31, 2017, the Company had paid $5.7 million and $0.1 million in collateral outstanding, respectively. 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.

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 (in thousands):
Non-trading 
Commodity
Notional

March 31, 2018

December 31, 2017
Natural Gas
MMBtu

5,585


9,191

Electricity
MWh

7,787


8,091

Trading
Commodity
Notional

March 31, 2018

December 31, 2017
Natural Gas
MMBtu

190


26

Natural Gas Basis
MMBtu

75


(225
)

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):

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Three Months Ended March 31,
  
2018
 
2017 (1)
Loss on non-trading derivatives, net
(36,712
)
 
$
(21,376
)
Gain (loss) on trading derivatives, net
170

 
(420
)
Loss on derivatives, net
(36,542
)
 
(21,796
)
Current period settlements on non-trading derivatives  (2) (3) (4) (5) (6)
(14,882
)
 
7,515

Current period settlements on trading derivatives
(655
)
 
(160
)
Total current period settlements on derivatives
$
(15,537
)
 
$
7,355


(1)
Financial information has been recast to include results attributable to the acquisition of Perigee Energy, LLC by an affiliate on February 3, 2017. See Notes 2 and 4, "Basis of Presentation and Summary of Significant Accounting Policies" and "Acquisitions," respectively, for further discussion.
(2)
Excludes settlements of zero and less than $0.1 million, respectively, for the three months ended March 31, 2018 and 2017 related to non-trading derivative liabilities assumed in the acquisitions of CenStar and Oasis.
(3)
Excludes settlements of $(0.8) million and $(1.3) million, respectively, for the three months ended March 31, 2018 and 2017 related to non-trading derivative liabilities assumed in the acquisitions of the Provider Companies and Major Energy Companies.
(4) Excludes settlements of $(0.1) million and zero for the three months ended March 31, 2018 and 2017 related to non-trading derivative liabilities assumed in the acquisitions of Perigee and other customers.
(5) Excludes settlements of less than $0.1 million for the three months ended March 31, 2018 related to non-trading derivative liabilities assumed in the acquisition of the Verde Companies.
(6) Excludes settlements of $0.1 million for the three months ended March 31, 2018 related to non-trading derivative liabilities assumed in the acquisition of the HIKO Companies.

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.
Fair Value of Derivative Instruments
The following tables summarize the fair value and offsetting amounts of the Company’s derivative instruments by counterparty and collateral received or paid as of (in thousands):
  
March 31, 2018
Description
Gross Assets

Gross
Amounts
Offset

Net Assets

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
20,777


$
(12,941
)

$
7,836


$


$
7,836

Trading commodity derivatives
140


(11
)

129




129

Total Current Derivative Assets
$
20,917


$
(12,952
)

$
7,965


$


$
7,965

Non-trading commodity derivatives
$
1,546


$
(1,284
)

$
262


$


$
262

Trading commodity derivatives
$


$


$


$


$

Total Non-current Derivative Assets
$
1,546


$
(1,284
)

$
262


$


$
262

Total Derivative Assets
$
22,463


$
(14,236
)

$
8,227


$


$
8,227



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March 31, 2018
Description
Gross 
Liabilities

Gross
Amounts
Offset

Net
Liabilities

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
(34,454
)

$
16,486


$
(17,968
)

$
5,660


$
(12,308
)
Trading commodity derivatives
(50
)

11


(39
)



(39
)
Total Current Derivative Liabilities
$
(34,504
)

$
16,497


$
(18,007
)

$
5,660


$
(12,347
)
Non-trading commodity derivatives
$
(17,051
)

$
6,925


$
(10,126
)

$


$
(10,126
)
Trading commodity derivatives
$
(932
)

$
20


$
(912
)

$


$
(912
)
Total Non-current Derivative Liabilities
$
(17,983
)

$
6,945


$
(11,038
)

$


$
(11,038
)
Total Derivative Liabilities
$
(52,487
)

$
23,442


$
(29,045
)

$
5,660


$
(23,385
)

  
December 31, 2017
Description
Gross Assets

Gross
Amounts
Offset

Net Assets

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
60,167


$
(29,432
)

$
30,735


$


$
30,735

Trading commodity derivatives
918


(462
)

456




456

Total Current Derivative Assets
61,085


(29,894
)

31,191




31,191

Non-trading commodity derivatives
16,055


(12,746
)

3,309




3,309

Trading commodity derivatives









Total Non-current Derivative Assets
16,055


(12,746
)

3,309




3,309

Total Derivative Assets
$
77,140


$
(42,640
)

$
34,500


$


$
34,500



December 31, 2017
Description
Gross 
Liabilities

Gross
Amounts
Offset

Net
Liabilities

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
(4,517
)

$
3,059


$
(1,458
)

$
65


$
(1,393
)
Trading commodity derivatives
(517
)

273


(244
)



(244
)
Total Current Derivative Liabilities
(5,034
)

3,332


(1,702
)

65


(1,637
)
Non-trading commodity derivatives
(676
)

732


56




56

Trading commodity derivatives
(566
)

18


(548
)



(548
)
Total Non-current Derivative Liabilities
(1,242
)

750


(492
)



(492
)
Total Derivative Liabilities
$
(6,276
)

$
4,082


$
(2,194
)

$
65


$
(2,129
)

12. Income Taxes

Income Taxes

The Company, CenStar and Verde Energy USA, Inc. (Verde Corp) are each subject to U.S. federal income tax as corporations. CenStar and Verde Corp will 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, the Company is subject to U.S. federal income taxation on its allocable share of Spark HoldCo’s net U.S. taxable income.

The Company reports federal and state income taxes for its share of the partnership income attributable to its ownership in Spark HoldCo and for the income taxes attributable to CenStar, a C-corporation, which is owned by

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Spark HoldCo. The income tax liability for the partnership does not accrue to the partnership, but rather the investors are responsible for the income taxes based upon the investor's share of the partnership's income. Net income attributable to the non-controlling interest in CenStar includes the provision for 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 the tax bases of the assets and liabilities. 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. 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.

On December 22, 2017, the President signed the Tax Cuts and Jobs Act (“U.S. Tax Reform”), which enacts a wide range of changes to the U.S. Corporate income tax system. For U.S. federal purposes, a corporate statutory income tax rate of 21% was utilized for the 2018 tax year. The Company remeasured its U.S. federal deferred tax assets and liabilities as of December 31, 2017 using the newly enacted 21% corporate tax rate, the rate expected to be applied when the temporary differences are settled. The Company has not revised any of the 2017 provisional estimates under SAB No. 118 and ASU No 2018-05, but is continuing to gather information and is waiting on further guidance from the IRS, SEC and FASB on U.S. Tax Reform.

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.

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 Retail and NuDevco Retail Holdings (predecessor to Retailco) on the IPO date. In addition, as of March 31, 2018, the Company had a total liability of $32.3 million for the effect of the Tax Receivable Agreement liability, with approximately $5.9 million classified as short-term liability and the remainder as a long-term liability. The Company had a long-term deferred tax asset of approximately $8.2 million related to the Tax Receivable Agreement liability. See Note 14 "Transactions with Affiliates" for further discussion.

The effective U.S. federal and state income tax rate for the three months ended March 31, 2018 and 2017 is 13.4% and 17.8%, respectively, with respect to pre-tax income attributable to the Company's stockholders. The lower effective tax rate for the three months ended March 31, 2018 is primarily attributable to the impact of the lower corporate U.S. federal statutory tax rate of 21% enacted for 2018, applied to the mix of earnings between corporate and partnership income.

Total income tax benefit for the three months ended March 31, 2018 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 interest. 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.
13. Commitments and Contingencies

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From time to time, the Company may be involved in legal, tax, regulatory and other proceedings in the ordinary course of business. Other than proceedings discussed below, 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 consolidated financial condition or results of operations. Liabilities for loss contingencies arising from claims, assessments, litigations or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.

Indirect Tax Audits

The Company is undergoing various types of indirect tax audits spanning from years 2009 to 2017 for which the Company 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, 2018, we have accrued $0.4 million related to indirect tax audits. The outcome of these indirect tax audits may result in additional expense.

Legal Proceedings

The Company is the subject of the following lawsuits. At the time of filing these combined and consolidated financial statements, this litigation is at an early stage and 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 this litigation or estimate a range of possible losses or a minimum loss that could result from an adverse verdict in a potential lawsuit.

Halifax-American Energy Company, LLC et al v. Provider Power, LLC, Electricity N.H., LLC, Electricity Maine, LLC, Emile Clavet and Kevin Dean is a lawsuit initially filed on June 12, 2014, in the Rockingham County Superior Court, State of New Hampshire, alleging various claims related to the Provider Companies’ employment of a sales contractor formerly employed with one or more of the plaintiffs, including misappropriation of trade secrets and tortious interference with a contractual relationship. The relief sought included compensatory and punitive damages and attorney's fees. The dispute occurred prior to the Company's acquisition of the Provider Companies. Portions of the original claim proceeded to trial and on January 19, 2016, a jury found in favor of the plaintiffs. Damages totaling approximately $0.6 million and attorney’s fees totaling approximately $0.3 million were awarded to the plaintiffs. On May 4, 2016, following post-verdict motions, the defendants filed an appeal in the State of New Hampshire Supreme Court, appealing, among other things the failure of the trial court to direct a verdict for the defendants, to set aside the verdict, or grant judgment for the defendants, and the trial court's award of certain attorneys' fees. The appellate hearing was held on June 1, 2017. The New Hampshire Supreme Court decided the appeal on February 9, 2018, upholding the jury's verdict and the trial court's rulings in all respects. On March 21, 2018, the trial court awarded Final Judgment to plaintiffs in the amount of $0.9 million, pursuant to the parties’ Joint Stipulation regarding Judgment. On March 28, 2018, plaintiffs moved to modify the final judgment because it does not factor in statutory interest. The trial court granted the motion to modify the judgment on April 6, 2018 and costs were assessed in the matter on April 5, 2018. The judgment, with costs, attorney fees, and interest total $1.0 million. As of March 31, 2018, the Company has accrued approximately $1.0 million in contingent liabilities related to this litigation. Initial damages and attorneys' fees have been factored into the purchase price for the Provider Companies, and the Company believes it has full indemnity coverage for any actual exposure in this award.

Katherine Veilleux and Jennifer Chon, individually and on behalf of all other similarly situated 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, an entity acquired by Spark HoldCo, LLC in mid-2016, enrolled and re-enrolled customers through fraudulent and misleading advertising, promotions, and other communications prior to the acquisition. Plaintiffs further allege that some improper enrollment and re-enrollment practices have continued to the present date. Plaintiffs allege the following claims against all defendants: violation of the Maine Unfair Trade Practices Act, violation of RICO, negligence, negligent misrepresentation, fraudulent misrepresentation, unjust enrichment and breach of contract.

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Plaintiffs seek unspecified damages for themselves and the purported class, rescission of contracts with Electricity Maine, injunctive relief, restitution, and attorney’s fees. By order dated November 15, 2017, the Court, pursuant to Rule 12(b)(6), dismissed all claims against Spark HoldCo except the claims for violation of the Maine Unfair Trade Practices Act and for unjust enrichment. Discovery limited to issues relevant to class certification under Rule 23 of the Federal Rules of Civil Procedure has just begun. Spark HoldCo intends to vigorously defend this matter and the allegations asserted therein, including the request to certify a class. Given the early stages of this matter, we cannot predict the outcome or consequences of this case at this time. The Company believes it is fully indemnified for this litigation matter, subject to certain limitations.

Gillis et al. v. Respond Power, LLC is a purported class action lawsuit that was originally filed on May 21, 2014 in the Philadelphia Court of Common Pleas. On June 23, 2014, the case was removed to the United States District Court for the Eastern District of Pennsylvania. On September 15, 2014, the plaintiffs filed an amended class action complaint seeking a declaratory judgment that the disclosure statement contained in Respond Power, LLC’s variable rate contracts with Pennsylvania consumers limited the variable rate that could be charged to no more than the monthly rate charged by the consumers’ local utility company. The plaintiffs also allege that Respond Power, LLC (i) breached its variable rate contract with Pennsylvania consumers, and the covenant of good faith and fair dealing therein, by charging rates in excess of the monthly rate charged by the consumers’ local utility company; (ii) engaged in deceptive conduct in violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law; and (iii) engaged in negligent misrepresentation and fraudulent concealment in connection with purported promises of savings. The amount of damages sought is not specified. By order dated August 31, 2015, the district court denied class certification. The plaintiffs appealed the district court’s denial of class certification to the United States Court of Appeals for the Third Circuit. The United States Court of Appeals for the Third Circuit vacated the district court’s denial of class certification and remanded the matter to the district court for further proceedings. The district court ordered briefing on defendant’s motion to dismiss. Respond Power LLC filed a motion to dismiss the plaintiffs’ declaratory judgment and breach of contract claims (the class claims) on June 30, 2017. The motion is fully briefed and submitted, and the parties are awaiting a decision from the Court. The Company currently cannot predict the outcome or consequences of this case at this time. The Company believes it is fully indemnified for this litigation matter, subject to certain limitations.

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. The parties have exchanged initial discovery. Plaintiffs’ motion for class certification was briefed and the Verde Companies filed its opposition to plaintiffs’ motion for class certification on October 17, 2017. On December 6, 2017, the Court granted the plaintiffs’ class certification motion. However, the Court opted not to send out class notices, and instead directed the parties to submit briefing on legal issues that could result in a modification or decertification of the class. The parties completed that briefing on April 16, 2018. The parties expect the court to schedule oral argument at some point in spring or summer 2018. 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. Given the early stage of this matter, we cannot predict the outcome or consequences of this case at this time.

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 by placing marketing calls using an automatic telephone dialing system 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. Plaintiffs are seeking statutory damages for the purported class and injunctive relief prohibiting Verde Companies' alleged conduct. Discovery on the claims of the named plaintiffs closed on November 10, 2017, and dispositive motions on the named plaintiffs’ claims were filed on November 24, 2017. Plaintiffs’ responses to the dispositive motions were filed on December 22, 2017 and Verde Companies’ reply briefs were filed on January 5, 2018. To date, no hearing has been set on these motions.  On

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March 19, 2018, Plaintiffs filed a Notice of Supplemental Authority regarding the D.C. Circuit’s decision in ACA Int’l v. FCC. Verde Companies filed a Notice of Supplemental Authority regarding the ACA decision on March 23, 2018.  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. Given the early stages of this matter, we cannot predict the outcome or consequences of this case at this time.

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. (Spark), has filed a lawsuit asserting claims of fraudulent inducement against NG&E, breach of contract against NG&E and the Company, and tortious interference with contract against the Company related to the membership interest purchase, subsequent transfer, 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. The lawsuit was filed on October 10, 2017 in the United States District Court for the Southern District of New York, and after the Company and NG&E filed a motion to dismiss, Horowitz filed an Amended Complaint, asserting the same four claims. The Company and NG&E filed a motion to dismiss the fraud and tortious interference claims on January 15, 2018. Briefing on the motion to dismiss concluded on March 1, 2018, and the Court's decision to rule or schedule oral argument is pending as of the date these financial statements are issued. Discovery has commenced and written discovery requests have been exchanged between the parties. This case is currently set for trial on September 9, 2019. The Company and NG&E deny the allegations asserted and intend to vigorously defend this matter. Given the early stages of this matter, we cannot predict the outcome or consequences of this case at this time.

Regulatory Matters

On April 9, 2018 the Attorney General for the State of Illinois filed a complaint against Major Energy Electric Services, LLC (Major) asserting claims that Major engaged in a pattern and practice of deceptive conduct intended to defraud Illinois consumers through door-to-door and telephone solicitations, in-person solicitations at retail establishments, advertisements on its website and direct mail advertisements to sign up for electricity services. The complaint seeks injunctive relief and monetary damages representing the amounts Illinois consumers have allegedly lost due to fraudulent marketing activities. The Attorney General also requests civil penalties under the Consumer Fraud Act and to revoke Major’s authority to operate in the state. The complaint was filed in the Circuit Court of Cook County, Illinois, County Department, Chancery Division. Major has not yet filed its initial responsive pleadings in this case. Major denies the allegations asserted and intends to vigorously defense this matter. Given the early stages of this matter, we cannot predict the outcome or consequences of this case at this time.

Spark Energy, LLC is the subject of two current investigations by the Connecticut Public Utilities Regulatory Authority (“PURA”). The first investigation constitutes a notice of violation and assessment of civil penalty in the amount of $0.9 million primarily for Spark Energy, LLC’s alleged failure to comply with regulations implemented in 2016 requiring that customer bills include any changes to existing rates effective for the next billing cycle. Spark Energy, LLC has requested a hearing in this matter which has been scheduled for May 11, 2018. The second investigation involves an inquiry into the marketing practices of one of Spark Energy, LLC’s former outbound telemarketing vendors. Certain agents managed by this vendor were allegedly using an unauthorized script in outbound marketing calls. Spark Energy, LLC has already responded to several interrogatories regarding this matter and is awaiting further instruction from PURA. We are unable to predict the outcome of these proceedings. While investigations of this nature have become common and are often resolved in a manner that allows the retailer to continue operating in Connecticut, there can be no assurance that PURA will not take more severe action.
14. 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 consolidated balance sheets as all affiliate activity is with parties under common control.

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Acquisition of Perigee

The acquisition of Perigee by the Company from NG&E was a transfer of equity interests of entities under common control on April 1, 2017. Refer to Note 4 "Acquisitions" for further discussion.

Master Service Agreement with Retailco Services, LLC

We entered into a Master Service Agreement (the “Master Service Agreement”) effective January 1, 2016 with Retailco Services, LLC ("Retailco Services"), which is wholly owned by our Founder. On March 7, 2018, we, Retailco Services and NuDevco Retail mutually agreed to terminate the MSA, effective April 1, 2018. The Master Service Agreement was for a one-year term and renewed automatically for successive one-year terms unless the Master Service Agreement was terminated by either party. Retailco Services provided us with operational support services such as: enrollment and renewal transaction services; customer billing and transaction services; electronic payment processing services; customer services and information technology infrastructure and application support services under the Master Service Agreement. Under the terms of the termination agreement, these operational support services were transferred back to the Company on April 1, 2018. See "Cost Allocations" for further discussion of the fees paid in connection with the Master Service Agreement during the three months ended March 31, 2018.

Acquisition of Customers from NG&E

On March 7, 2018, we entered into an asset purchase agreement with NG&E pursuant to which we will acquire approximately 50,000 RCEs from NG&E for a cash purchase price of $250 for each RCE, or approximately $12.5 million in the aggregate. These customers are expected to begin transferring after April 1, 2018 and are located in 24 markets in 8 states.

Accounts Receivable and PayableAffiliates
The Company recorded current accounts receivable—affiliates of $3.1 million and $3.7 million as of March 31, 2018 and December 31, 2017, respectively, and current accounts payable—affiliates of $4.0 million and $4.6 million as of March 31, 2018 and December 31, 2017, respectively, for certain direct billings and cost allocations for services the Company provided to affiliates, services our affiliates provided to us, and sales or purchases of natural gas and electricity with affiliates.
Revenues and Cost of RevenuesAffiliates
Cost of revenues—affiliates, recorded in net asset optimization revenues in the condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017 were less than $0.1 million and zero, respectively.
Revenues—affiliates, recorded in net asset optimization revenues in the condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017 were $0.6 million and zero, respectively.
Cost Allocations

The Company paid certain expenses on behalf of affiliates, which are reimbursed by the affiliates to the Company, and our affiliates paid certain expenses on our behalf, which are reimbursed by us. These transactions include 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 or us could not be determined by specific identification for direct billing, the costs were primarily allocated to the affiliated entities or us based on percentage of departmental usage, wages or headcount. The total net amount direct billed and allocated from

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affiliates was $6.9 million and $7.4 million, respectively, for the three months ended March 31, 2018 and 2017, respectively.

Of the $6.9 million and $7.4 million total net amounts directly billed and allocated from affiliates, the Company recorded general and administrative expense of $5.3 million and $7.3 million for the three months ended March 31, 2018 and 2017, respectively, in the condensed consolidated statement of operations in connection with fees paid under the Master Service Agreement with Retailco Services. Additionally under the Master Service Agreement, we capitalized $0.5 million and $0.1 million of property and equipment for the application, development and implementation of various systems during three months ended March 31, 2018 and 2017, respectively.

Distributions to and Contributions from Affiliates

During the three months ended March 31, 2018 and 2017, the Spark HoldCo made net capital distributions to NuDevco Retail and Retailco of $3.9 million in conjunction with the payment of quarterly distributions attributable to its Spark HoldCo units. During the three months ended March 31, 2018 and 2017, Spark HoldCo made distributions to NuDevco Retail and Retailco for gross-up distributions of $0.9 million and $0.5 million