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 September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.        
Large accelerated filer o                  Accelerated filer x 
Non-accelerated filer o Smaller reporting company o
Emerging Growth Company 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 13,393,712 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 October 31, 2018.




PART I. FINANCIAL INFORMATION
 
 
ITEM 1. FINANCIAL STATEMENTS
 
 
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2018 AND DECEMBER 31, 2017 (unaudited)
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (unaudited)
 
 
 
 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 (unaudited)
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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
 
SIGNATURES
 


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Table of Contents

Below is a list of terms that are common to our business and used throughout this document.

CFTC. The Commodity Futures Trading Commission.

ERCOT. The Electric Reliability Council of Texas, the independent system operator and the regional coordinator of various electricity systems within Texas.

FERC. The Federal Energy Regulatory Commission, a regulatory body that regulates, among other things, the transmission and wholesale sale of electricity and the transportation of natural gas by interstate pipelines in the United States.

ISO. An independent system operator. An ISO manages and controls transmission infrastructure in a particular region.

MMBtu. One million British Thermal Units, a standard unit of heating equivalent measure for natural gas. A unit of heat equal to 1,000,000 Btus, or 1 MMBtu, is the thermal equivalent of approximately 1,000 cubic feet of natural gas.

MWh. One megawatt hour, a unit of electricity equal to 1,000 kilowatt hours (kWh), or the amount of energy equal to one megawatt of constant power expended for one hour of time.

Non-POR Market. A non-purchase of accounts receivable market.

NYPSC. New York Public Service Commission.

POR Market. A purchase of accounts receivable market.

RCE. A residential customer equivalent, refers to a natural gas customer with a standard consumption of 100 MMBtus per year or an electricity customer with a standard consumption of 10 MWhs per year.

REP. A retail electricity provider.

RTO. A regional transmission organization. A RTO, similar to an ISO, is a third party entity that manages transmission infrastructure in a particular region.

When we refer to "we," "us," "our," "ours," "the Company," or "Spark Energy," we are describing Spark Energy, Inc. and/or our subsidiaries.

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Table of Contents

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. These forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), can be identified by the use of forward-looking terminology including “may,” “should,” “likely,” “will,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “plan,” “intend,” “projects,” or other similar words. All statements, other than statements of historical fact included in this report, regarding strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans, objectives and beliefs of management are forward-looking statements. Forward-looking statements appear in a number of places in this report and may include statements about business strategy and prospects for growth, customer acquisition costs, legal proceedings, ability to pay cash dividends, cash flow generation and liquidity, availability of terms of capital, competition and government regulation and general economic conditions. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove correct.
The forward-looking statements in this report are subject to risks and uncertainties. Important factors that could cause actual results to materially differ from those projected in the forward-looking statements include, but are not limited to:
changes in commodity prices and the sufficiency of risk management and hedging policies and practices;
extreme and unpredictable weather conditions, and the impact of hurricanes and other natural disasters;
federal, state and local regulation, including the industry's ability to address or adapt to potentially restrictive new regulations that may be enacted by the New York Public Service Commission or other public utility commissions;
our ability to borrow funds and access credit markets and restrictions in our debt agreements and collateral requirements;
credit risk with respect to suppliers and customers;
changes in costs to acquire customers and actual attrition rates;
accuracy of billing systems;
whether our majority stockholder or its affiliates offer us acquisition opportunities at all, or on terms that are commercially acceptable to us;
our ability to successfully identify, complete, and efficiently integrate acquisitions into our operations;
significant changes in, or new changes by, the ISOs in the regions we operate;
competition; and
the "Risk Factors" in our Annual Report Form 10-K for the year ended December 31, 2017, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 and our other public filings and press releases.

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


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PART 1. — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
SPARK ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
(in thousands, except share counts)
(unaudited)

September 30, 2018

December 31, 2017
Assets



Current assets:



Cash and cash equivalents
$
42,796


$
29,419

Accounts receivable, net of allowance for doubtful accounts of $4,324 at September 30 and $4,023 at December 31
134,183


158,814

Accounts receivable—affiliates
3,807

 
3,661

Inventory
4,077


4,470

Fair value of derivative assets
23,427


31,191

Customer acquisition costs, net
15,600


22,123

Customer relationships, net
18,360


18,653

Deposits
12,631


7,701

Other current assets
31,074


20,706

Total current assets
285,955


296,738

Property and equipment, net
5,383


8,275

Fair value of derivative assets
1,873


3,309

Customer acquisition costs, net
3,466


6,949

Customer relationships, net
28,247


34,839

Deferred tax assets
24,935


24,185

Goodwill
120,343


120,154

Other assets
11,075


11,500

Total assets
$
481,277


$
505,949

Liabilities, Series A Preferred Stock and Stockholders' Equity



Current liabilities:



Accounts payable
$
55,496


$
77,510

Accounts payable—affiliates
2,836


4,622

Accrued liabilities
45,518


33,679

Fair value of derivative liabilities
269


1,637

Current portion of Senior Credit Facility


7,500

Current payable pursuant to tax receivable agreement—affiliates
2,508


5,937

Current contingent consideration for acquisitions
2,980


4,024

Other current liabilities
856


2,675

Current portion of note payable
10,535


13,443

Total current liabilities
120,998


151,027

Long-term liabilities:





Fair value of derivative liabilities
489


492

Payable pursuant to tax receivable agreement—affiliates
26,067


26,355

Long-term portion of Senior Credit Facility
112,000


117,750

Subordinated debt—affiliate
10,000



Long-term portion of note payable


7,051

Contingent consideration for acquisitions


626

Other long-term liabilities


172

Total liabilities
269,554


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 September 30 and 1,704,339 shares issued and outstanding at December 31
90,758


41,173

Stockholders' equity:





       Common Stock:





Class A common stock, par value $0.01 per share, 120,000,000 shares authorized, 13,493,158 issued, and 13,393,712 outstanding at September 30 and 13,235,082 issued and 13,135,636 outstanding at December 31
135


132

Class B common stock, par value $0.01 per share, 60,000,000 shares authorized, 21,485,126 issued and outstanding at September 30 and December 31
216


216

       Additional paid-in capital
25,387


26,914

       Accumulated other comprehensive loss
(15
)

(11
)
       Retained earnings
2,885


11,008

       Treasury stock, at cost, 99,446 shares at September 30 and December 31
(2,011
)

(2,011
)
       Total stockholders' equity
26,597


36,248

Non-controlling interest in Spark HoldCo, LLC
94,368


125,055

       Total equity
120,965


161,303

Total liabilities, Series A Preferred Stock and stockholders' equity
$
481,277


$
505,949


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 INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(in thousands, except per share data)
(unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017
Revenues:







Retail revenues
$
258,127


$
215,856


$
773,616


$
563,960

Net asset optimization revenues/(expense)
348


(320
)

3,798


(681
)
Total Revenues
258,475


215,536


777,414


563,279

Operating Expenses:







Retail cost of revenues
193,409


160,373


645,954


420,771

General and administrative
25,695


25,566


83,522


69,405

Depreciation and amortization
13,917


11,509


39,797


30,435

Total Operating Expenses
233,021


197,448


769,273


520,611

Operating income
25,454


18,088


8,141


42,668

Other (expense)/income:







Interest expense
(2,762
)

(2,863
)

(7,323
)

(8,760
)
Interest and other income (loss)
(47
)

168


707


102

Total other expenses
(2,809
)

(2,695
)

(6,616
)

(8,658
)
Income before income tax expense
22,645


15,393


1,525


34,010

Income tax expense
3,818


2,451


602


5,265

Net income
$
18,827


$
12,942


$
923


$
28,745

Less: Net income attributable to non-controlling interests
13,218


10,595


140


23,049

Net income attributable to Spark Energy, Inc. stockholders
$
5,609


$
2,347


$
783


$
5,696

Less: Dividend on Series A preferred stock
2,027


932


6,081


2,106

Net income (loss) attributable to stockholders of Class A common stock
$
3,582


$
1,415


$
(5,298
)

$
3,590

Other comprehensive income, net of tax:







Currency translation gain (loss)
$
47


$
(13
)

$
(11
)

$
(88
)
Other comprehensive income (loss)
47


(13
)

(11
)

(88
)
Comprehensive income
$
18,874


$
12,929


$
912


$
28,657

Less: Comprehensive income attributable to non-controlling interests
13,247


10,587


133


22,994

Comprehensive income attributable to Spark Energy, Inc. stockholders
$
5,627


$
2,342


$
779


$
5,663

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



       Basic
$
0.27


$
0.11


$
(0.40
)

$
0.27

       Diluted
$
0.27


$
0.11


$
(0.40
)

$
0.27











Weighted average shares of Class A common stock outstanding









       Basic
13,394


13,235


13,254


13,112

       Diluted
13,394


13,392


13,254


13,315

 
 
 
 
 
 
 
 
Dividends declared per share of Class A common stock
$
0.18125


$
0.18125

 
$
0.54375


$
0.54375


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

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Table of Contents

SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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







3,596


3,596


3,596

Restricted stock unit vesting
258



3




(715
)

(712
)

(712
)
Consolidated net income








783

783

140

923

Foreign currency translation adjustment for equity method investee






(4
)


(4
)
(7
)
(11
)
Distributions paid to non-controlling unit holders










(23,701
)
(23,701
)
Dividends paid to Class A common stockholders







(2,381
)
(4,852
)
(7,233
)

(7,233
)
Dividends to Preferred Stock







(2,027
)
(4,054
)
(6,081
)

(6,081
)
Acquisition of Customers from Affiliate











(7,119
)
(7,119
)
Balance at September 30, 2018
13,493

21,485

(99
)
$
135

$
216

$
(2,011
)
$
(15
)
$
25,387

$
2,885

$
26,597

$
94,368

$
120,965

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


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Table of Contents

SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(in thousands)
(unaudited)

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Table of Contents

  
Nine Months Ended September 30,
  
2018

2017
Cash flows from operating activities:



Net income
$
923


$
28,745

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



Depreciation and amortization expense
38,538


30,584

Deferred income taxes
(749
)

681

Change in TRA liability
79



Stock based compensation
3,707


4,023

Amortization of deferred financing costs
1,243


750

Excess tax benefit related to restricted stock vesting
(101
)

179

Change in Fair Value of Earnout liabilities
(63
)

(9,423
)
Accretion on fair value of Earnout liabilities


3,787

Bad debt expense
8,480


3,436

Loss on derivatives, net
1,371


34,225

Current period cash settlements on derivatives, net
6,189


(20,816
)
Accretion of discount to convertible subordinated notes to affiliate


1,004

Payment of the Major Energy Companies Earnout


(1,104
)
Payment of the Provider Companies Earnout


(677
)
Other
(489
)

123

Changes in assets and liabilities:



Decrease in accounts receivable
21,029


18,056

Increase in accounts receivable—affiliates
(390
)

(2,508
)
Decrease (increase) in inventory
475


(1,936
)
Increase in customer acquisition costs
(8,949
)

(18,642
)
(Increase) decrease in prepaid and other current assets
(10,999
)

1,536

Increase in intangible assets—customer acquisitions
(86
)

(32
)
Decrease (increase) in other assets
92


(664
)
Decrease in accounts payable and accrued liabilities
(11,062
)

(9,301
)
(Decrease) increase in accounts payable—affiliates
(1,786
)

1,165

(Decrease) increase in other current liabilities
(5,140
)

22

Decrease in other non-current liabilities
(459
)

(1,170
)
Net cash provided by operating activities
41,853


62,043

Cash flows from investing activities:



Purchases of property and equipment
(1,097
)

(1,438
)
Acquisitions of Perigee and other customers


(11,464
)
Acquisition of the Verde Companies


(65,785
)
Verde working capital settlement
470



Acquisition of HIKO
(14,290
)


Acquisition of Customers from Affiliate
(8,776
)


Net cash used in investing activities
(23,693
)

(78,687
)
Cash flows from financing activities:



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


40,312

Borrowings on notes payable
277,800


139,400

Payments on notes payable
(281,050
)

(119,664
)
Payment of the Major Energy Companies Earnout
(1,607
)

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


(7,061
)
Payments on the Verde promissory note
(6,573
)

(2,149
)
Proceeds from disgorgement of stockholders short-swing profits
244


872

Restricted stock vesting
(2,589
)

(2,009
)
Payment of Tax Receivable Agreement liability
(3,577
)


Payment of dividends to Class A common stockholders
(7,233
)

(7,137
)
Payment of distributions to non-controlling unitholders
(23,701
)

(24,270
)
Payment of Dividends to Preferred Stock
(4,987
)

(1,174
)
Purchase of Treasury Stock


(1,888
)
Net cash (used in) provided by financing activities
(4,783
)

8,933

Increase (decrease) in Cash and cash equivalents
13,377


(7,711
)
Cash and cash equivalents—beginning of period
29,419


18,960

Cash and cash equivalents—end of period
$
42,796


$
11,249

Supplemental Disclosure of Cash Flow Information:



Non-cash items:





Contingent consideration—earnout obligations incurred in connection with the Verde Companies acquisition
$


$
5,400

Net contribution by NG&E in excess of cash
$


$
1,019

        Installment consideration incurred in connection with the Verde Companies acquisition
$


$
17,851

        Property and equipment purchase accrual
$
(123
)

$
41

Cash paid during the period for:



Interest
$
5,955


$
4,113

Taxes
$
7,461


$
7,769

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

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Table of Contents

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

Spark Energy 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”). The Company is the sole managing member of Spark HoldCo, is responsible for all operational, management and administrative decisions relating to Spark HoldCo’s business and consolidates the financial results of Spark HoldCo and its subsidiaries. Spark HoldCo is the direct and indirect owner of the subsidiaries through which we operate. We conduct our business through several brands across our service areas, including Spark Energy, Verde Energy, Oasis Energy, CenStar Energy, Provider Power Massachusetts, Electricity Maine, Electricity N.H., Major Energy, Respond Power, HIKO Energy, and Perigee Energy.

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.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
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") as it applies to interim financial statements. This information should be read along with our consolidated financial statements and notes contained in our annual report on Form 10-K for the year ended December 31, 2017. Our unaudited condensed consolidated financial statements are presented on a consolidated basis and include all wholly-owned and controlled subsidiaries. We account for investments over which we have significant influence but not a controlling financial interest using the equity method of accounting. All significant intercompany transactions and balances have been eliminated in the unaudited condensed consolidated financial statements.
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.
Use of Estimates
The preparation of our condensed consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim financial statements and the reported amounts of revenues and expenses during the period. Actual results could materially differ from those estimates. 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,

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Table of Contents

necessary for a fair presentation of the condensed consolidated financial statements. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the full year or for any interim period.

Significant Accounting Policies

There have been no changes to our significant accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, except as follows:

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. We 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. 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.

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 certain items in the statement of cash flows. This ASU has been applied using a retrospective transition method for each period presented. We adopted ASU 2016-15 effective January 1, 2018, which 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 $1.8 million from cash flows from investing activities to cash flows from operating activities for the nine months ended September 30, 2017. We also reclassified other acquisition related payments of approximately $15.5 million from cash flows from investing activities to cash flows from financing activities for the nine months ended September 30, 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. We adopted ASU 2017-01 effective January 1, 2018, using it to evaluate all acquisitions after that date.

New Accounting Standards Being Evaluated But Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). Under this new guidance, lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of greater than twelve months. The guidance requires qualitative disclosures along with certain specific quantitative disclosures for both lessees and lessors. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”), and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), to provide additional guidance for the adoption of Topic 842. The ASU and its related amendments 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 with an option to use certain practical expedients, which we expect to use. We are continuing to evaluate the impact of this new guidance and have put in place a process to review lease contracts, evaluate existing lease related processes and design training related to the new standard. Although we are in the process of evaluating the impact of the new lease guidance on our consolidated financial statements, we currently believe the primary impact will be related to our real estate operating leases.

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

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by eliminating Step 2 from the goodwill impairment test. Under 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, including goodwill. 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. We are currently evaluating the impact of adopting this guidance on its consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting ("ASU 2018-07"). ASU 2018-07 primarily expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We are currently evaluating the impact of adopting this guidance on its consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements ("ASU 2018-09"). ASU 2018-09 represent changes to clarify, correct errors in, or make minor improvements to the Codification to a variety of topics, including comprehensive income, debt modifications and extinguishment, stock compensation, income taxes, fair value measurement, financial brokers and dealers, and defined contribution plans. The transition and effective date guidance is based on the facts and circumstances of each amendment. Many of the amendments in this Update do have transition guidance with effective dates for annual periods beginning after December 15, 2018. We are currently evaluating the impact of adopting this guidance on its consolidated financial statements.



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

We record gross receipts taxes on a gross basis in retail revenues and retail cost of revenues. During the three months ended September 30, 2018 and 2017, our retail revenues included gross receipts taxes of $2.2 million and $2.1 million, respectively. During the three months ended September 30, 2018 and 2017, our retail cost of revenues included gross receipts taxes of $2.7 million and $2.7 million, respectively. During the nine months ended September 30, 2018 and 2017, our retail revenues included gross receipts taxes of $6.5 million and $4.6 million, respectively. During the nine months ended September 30, 2018 and 2017, our retail cost of revenues included gross receipts taxes of $7.8 million and $6.6 million, respectively.

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

The following is a description of our principal revenue generating activities.

Retail Electricity

Revenues for electricity sales are recognized under the accrual method when our performance obligation to a customer is satisfied, which is the point in time when the product is delivered and control of the product passes to the customer. Electricity 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 typically 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 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 Natural Gas

Revenues for natural gas sales are recognized under the accrual method when our performance obligation to a customer is satisfied, which is the point in time when the product is delivered and control of the product passes to the customer. 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 typically 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.

The following table discloses revenue by primary geographical market, customer type, and customer credit risk profile (in thousands). The table also includes a reconciliation of the disaggregated revenue to revenue by reportable segment (in thousands).

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Reportable Segments
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Retail Electricity

Retail Natural Gas

Total Reportable Segments
 
Retail Electricity

Retail Natural Gas

Total Reportable Segments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary markets (a)
 
 
 
 
 
 
 
 
 
 
 
  New England
$
110,870


$
2,163

 
$
113,033

 
$
61,421

 
$
2,157

 
$
63,578

  Mid-Atlantic
83,846


3,762

 
87,608

 
83,955

 
4,543

 
88,498

  Midwest
20,898


2,557

 
23,455

 
20,111

 
2,570

 
22,681

  Southwest
30,568


3,463

 
34,031

 
36,772

 
4,327

 
41,099


$
246,182

 
$
11,945

 
$
258,127

 
$
202,259

 
$
13,597

 
$
215,856


 
 
 
 

 
 
 
 
 
 
Customer type




 
 
 
 
 
 
 
 
  Commercial
$
101,818


$
4,650

 
$
106,468

 
$
55,489

 
$
5,004

 
$
60,493

  Residential
151,918


7,068

 
158,986

 
143,152

 
8,571

 
151,723

  Unbilled revenue (b)
(7,554
)

227

 
(7,327
)
 
3,618

 
22

 
3,640


$
246,182

 
$
11,945

 
$
258,127

 
$
202,259

 
$
13,597

 
$
215,856


 
 
 
 
 
 
 
 
 
 
 
Customer credit risk



 

 
 
 
 
 
 
  POR
$
172,198


$
5,013

 
$
177,211

 
$
138,544

 
$
5,963

 
$
144,507

  Non-POR
73,984


6,932

 
80,916

 
63,715

 
7,634

 
71,349


$
246,182

 
$
11,945

 
$
258,127

 
$
202,259

 
$
13,597

 
$
215,856





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Reportable Segments
 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
Retail Electricity

Retail Natural Gas

Total Reportable Segments
 
Retail Electricity

Retail Natural Gas

Total Reportable Segments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary markets (a)




 
 
 
 
 
 
 
  New England
$
305,894


$
14,742


$
320,636

 
$
157,334


$
15,252

 
$
172,586

  Mid-Atlantic
229,329


39,112


268,441

 
197,877


35,664

 
233,541

  Midwest
56,818


27,243


84,061

 
43,073


23,893

 
66,966

  Southwest
84,487


15,991


100,478

 
69,577


21,290

 
90,867


$
676,528

 
$
97,088

 
$
773,616

 
$
467,861

 
$
96,099

 
$
563,960


 
 
 
 
 
 
 
 
 
 
 
Customer type




 
 
 
 
 
 
 
  Commercial
$
275,966


$
39,826


$
315,792

 
$
140,408


$
40,224

 
$
180,632

  Residential
415,022


73,138


488,160

 
322,354


70,886

 
393,240

  Unbilled revenue (b)
(14,460
)

(15,876
)

(30,336
)
 
5,099


(15,011
)
 
(9,912
)

$
676,528

 
$
97,088

 
$
773,616

 
$
467,861

 
$
96,099

 
$
563,960


 
 
 
 
 
 
 
 
 
 
 
Customer credit risk




 
 
 
 
 
 
 
  POR
$
473,438


$
54,565


$
528,003

 
$
318,440


$
47,907

 
$
366,347

  Non-POR
203,090


42,523


245,613

 
149,421


48,192

 
197,613


$
676,528

 
$
97,088

 
$
773,616

 
$
467,861

 
$
96,099

 
$
563,960



(a) The primary markets 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 it is actualized, at which time it is categorized between commercial and residential customers.
4. Acquisitions
Acquisition of HIKO
On March 1, 2018, we entered into a Membership Interest Purchase Agreement under which we acquired all of the membership interests of HIKO Energy, LLC ("HIKO"), a New York limited liability company, for a total purchase price of $6.0 million in cash, plus working capital. At the time of acquisition, HIKO had a total of approximately 29,000 RCEs located in 42 markets in seven states. The acquisition was accounted for under the acquisition method in accordance with ASC 805, Business Combinations (“ASC 805”). Our preliminary allocation of the purchase price was based upon the estimated fair value of the tangible and identified intangible assets acquired and liabilities assumed in the acquisition. The preliminary allocation was made 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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Reported as of March 31, 2018
2018 Adjustments (1)
As of September 30, 2018
Cash and restricted cash
$
309

$
66

$
375

Intangible assetscustomer relationships
6,205

(174
)
6,031

Net working capital, net of cash acquired
9,041

(576
)
8,465

Fair value of derivative liabilities
(205
)

(205
)
Total
$
15,350

$
(684
)
$
14,666

(1) Changes to the purchase price allocation in 2018 were due to an agreement to settle the working capital balances with HIKO sellers per the purchase agreement.

Our condensed consolidated statements of operations for the three months ended September 30, 2018 included $4.9 million of revenue and $1.1 million of net income related to the operations of HIKO. Our condensed consolidated statements of operations for the nine months ended September 30, 2018 included $12.9 million of revenue and $3.7 million of net income related to the operations of HIKO.

Acquisition of Verde

On July 1, 2017, we acquired, through our subsidiary CenStar Energy Corp. ("CenStar"), all of the outstanding membership interests and stock in a group of companies (the "Verde Companies") from Verde Energy USA Holdings, LLC (the "Seller"). Total consideration was approximately $90.7 million, of which $20.1 million represented positive net working capital, as adjusted. We 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 our Founder through a subordinated debt facility, (iii) approximately $44.0 million in borrowings under our senior secured revolving credit facility, and (iv) the issuance of a promissory note to the Seller in the aggregate principal amount of $20.0 million (the “Promissory Note”). In addition to the consideration paid at closing, we were obligated to pay an additional amount based on achievement by the Verde Companies of certain performance targets over the 18 month period following the closing of the acquisition (the "Verde Earnout"). The Verde Earnout was initially valued at $5.4 million.

In January 2018, Spark and the Seller agreed to terminate the Verde Earnout and settled the Verde Earnout obligation with the issuance of a $5.9 million promissory note payable to the Seller due in June 2019.

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 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 final allocation of the purchase consideration is as follows (in thousands):

 
Reported as of December 31, 2017
Adjustments (1)
As of September 30, 2018
Cash and restricted cash
$
1,653

$

$
1,653

Property and equipment
4,560


4,560

Intangible assetscustomer relationships
28,700


28,700

Intangible assetstrademarks
3,000


3,000

Goodwill (1)
39,207

189

39,396

Net working capital, net of cash acquired (1)
19,132

(659
)
18,473

Deferred tax liability
(3,126
)

(3,126
)
Fair value of derivative liabilities
(1,942
)

(1,942
)
Total
$
91,184

$
(470
)
$
90,714


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(1) Changes to the purchase price allocation in 2018 were due to an agreement to settle the working capital balances with Verde Companies' sellers per the purchase agreement.

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

 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2017
2016
2017
2016
Revenues
$
215,536

$
206,158

$
633,639

$
512,967

Earnings
$
2,347

$
1,761

$
4,991

$
9,623


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 pro forma results above include actual results and costs as well as 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.

Acquisition of Perigee

On April 1, 2017, the Company and Spark Holdco acquired all of the outstanding membership interests of Perigee Energy, LLC, a Texas limited liability company ("Perigee"), with operations across 14 utilities in Connecticut, Delaware, Massachusetts, New York and Ohio from our affiliate, National Gas & Electric ("NG&E"). 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 was a transfer of equity interests between entities under common control, and accordingly, the assets acquired and liabilities assumed were based on their historical value as of the acquisition date. 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 assetscustomer relationships
1,100

Goodwill
1,540

Net working capital, net of cash acquired
2,085

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


In each of our acquisitions, we evaluate and allocate purchase price based on the following general assumptions.

Customer relationships

Acquired customer relationships intangibles are reflective of the acquired companies' customer bases, and were valued using an excess earnings method under the income approach. Using this method, we estimate the future cash flows resulting from the existing customer relationships, considering estimated attrition as well as charges for contributory assets, such as net working capital, intangible assets, fixed assets, and any assembled workforce. These future cash flows are 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 are amortized to depreciation and amortization based on the expected future net cash flows by year.


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In the Verde acquisition, customer relationships were bifurcated between unhedged and hedged and are being amortized based on the expected term of the underlying fixed price contract acquired in each reporting period, respectively.

Trademarks

The fair value of acquired trademarks is reflective of the value associated with the recognition and reputation of the acquired company to target markets. The fair value of trademarks are valued using a royalty savings method under the income approach. The value is based on the savings we would realize from owning the trademark rather than paying a royalty for the use of that trademark. Under this approach, we estimate the present value of the expected cash flows resulting from avoiding royalty payments to use a third party trademark. In the Verde acquisition, 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. Trademarks are amortized over the estimated 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 is recorded as goodwill. Goodwill arose on the acquisitions of the Verde Companies and Perigee primarily due to the value of their assembled workforce, proprietary sales channels, and/or access to new utility service territories. Goodwill recorded in connection with these acquisitions is deductible for income tax purposes because these were acquisitions of all of the assets of the companies.

5. Equity

Non-controlling Interest

We hold an economic interest and are the sole managing member in Spark HoldCo, with NuDevco Retail and Retailco holding the remaining economic interests in Spark HoldCo. As a result, we have consolidated the financial position and results of operations of Spark HoldCo and reflected the economic interests owned 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 September 30, 2018, respectively.

 
The Company
NuDevco Retail and Retailco (1)
December 31, 2017
38.12
%
61.88
%
September 30, 2018
38.58
%
61.42
%

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

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017
 


 



 
Net income allocated to non-controlling interest
$
13,910


$
9,525


$
830


$
21,094

Income tax expense (benefit) allocated to non-controlling interest
692


(1,070
)

690


(1,955
)
Net income attributable to non-controlling interest
$
13,218


$
10,595


$
140


$
23,049


Share Repurchase Program


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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.

Treasury Stock

We use the cost method to account for our treasury shares. Purchases of shares of Class A common stock are recorded at cost.

Class A Common Stock and Class B Common Stock

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

Dividends declared for the Company's Class A common stock are reported as a reduction of retained earnings, or additional paid in capital in the case retained earnings is exhausted.

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 us. 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 our outstanding unvested restricted stock units and (2) using the if-converted method to determine the potential dilutive effect of our Class B common stock.

The following table presents the computation of earnings (loss) per share for the three and nine months ended September 30, 2018 and 2017 (in thousands, except per share data):

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

2018
2017
2018
2017
Net income attributable to Spark Energy, Inc. stockholders
$
5,609

$
2,347

$
783

$
5,696

Less: Dividend on Series A preferred stock
2,027

932

6,081

2,106

Net income (loss) attributable to stockholders of Class A common stock
$
3,582

$
1,415

$
(5,298
)
$
3,590

 
 
 
 
 
Basic weighted average Class A common shares outstanding
13,394

13,235

13,254

13,112

Basic earnings (loss) per share attributable to stockholders
$
0.27

$
0.11

$
(0.40
)
$
0.27






Net income (loss) attributable to stockholders of Class A common stock
$
3,582

$
1,415

$
(5,298
)
$
3,590

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




Diluted net income (loss) attributable to stockholders of Class A common stock
$
3,582

$
1,415

$
(5,298
)
$
3,590

 
 
 
 
 
Basic weighted average Class A common shares outstanding
13,394

13,235

13,254

13,112

Effect of dilutive Class B common stock




Effect of dilutive restricted stock units

157


203

Diluted weighted average shares outstanding
13,394

13,392

13,254

13,315






Diluted earnings (loss) per share attributable to stockholders
$
0.27

$
0.11

$
(0.40
)
$
0.27


The computation of diluted earnings per share for the three and nine months ended September 30, 2018 excludes 21.5 million shares of Class B common stock and 0.8 million restricted stock units because of their antidilutive effect. The Company's outstanding shares of Series A Preferred Stock were not included in the calculation of diluted earnings per share because they contain only contingent redemption provisions which have not occurred.

Variable Interest Entity

Spark HoldCo is a variable interest entity due to its lack of rights to participate in significant financial and operating decisions and its inability to dissolve or otherwise remove its management. Spark HoldCo owns all of the outstanding membership interests in each of the operating subsidiaries through which we operate. We are the sole managing member of Spark HoldCo, manage Spark HoldCo's operating subsidiaries through this managing membership interest, and are considered the primary beneficiary of Spark HoldCo. The assets of Spark HoldCo cannot be used to settle our obligations except through distributions to us, and the liabilities of Spark HoldCo cannot be settled by us except through contributions to Spark HoldCo. The following table includes the carrying amounts and classification of the assets and liabilities of Spark HoldCo that are included in our condensed consolidated balance sheet as of September 30, 2018 (in thousands):


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Table of Contents


September 30, 2018
Assets

Current assets:

   Cash and cash equivalents
$
42,677

   Accounts receivable
134,183

   Other current assets
102,338

   Total current assets
279,198

Non-current assets:

   Goodwill
120,343

   Other assets
47,958

   Total non-current assets
168,301

   Total Assets
$
447,499



Liabilities

Current liabilities:

   Accounts payable and accrued liabilities
$
101,004

   Contingent consideration
2,980

   Other current liabilities
14,496

   Total current liabilities
118,480

Long-term liabilities:

   Long-term portion of Senior Credit Facility
112,000

   Subordinated debt  affiliate
10,000

   Other long-term liabilities
489

   Total long-term liabilities
122,489

   Total Liabilities
$
240,969


6. Preferred Stock

On March 15, 2017, we 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 us, net of underwriting discounts and commissions). We 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, we 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, we may sell, from time to time through the Agent, our Series A Preferred Stock, having an aggregate offering price of up to $50.0 million. During the year ended December 31, 2017, we sold an aggregate of 94,339 shares of Series A Preferred Stock under the ATM Agreement. We 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. During the nine months ended September 30, 2018, we sold an aggregate of 2,917 shares of Series A Preferred Stock under the ATM Agreement. We 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.

On January 23, 2018, we commenced a public offering of our 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 offering, we 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, net of underwriting discounts and commissions). The

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Table of Contents

Company received approximately $48.9 million in net 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.

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

During the three and nine months ended September 30, 2018, respectively, we paid $2.0 million and $5.0 million in dividends to holders of the Series A Preferred Stock. As of September 30, 2018, we had accrued $2.0 million related to dividends to holders of the Series A Preferred Stock. This dividend was paid on October 15, 2018.

A summary of our preferred equity balance for the nine months ended September 30, 2018 is as follows:


(in thousands)
Balance 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

Balance at September 30, 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 us, including specific terms relating to distributions by Spark HoldCo in connection with the payment by us of dividends on the Series A Preferred Stock, the priority of liquidating distributions by Spark HoldCo, the allocation of income and loss to us in connection with distributions by Spark HoldCo on Series A preferred units, and other terms relating to the redemption and conversion by us of the Series A Preferred Stock.

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

Estimated useful
lives (years)
 
September 30, 2018
 
December 31, 2017
Information technology
2 – 5
 
$
34,279

 
$
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

 
41,620

 
41,444

Accumulated depreciation

 
(36,237
)
 
(33,169
)
Property and equipment—net

 
$
5,383

 
$
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 September 30, 2018 and December 31, 2017, information technology includes $0.5 million and $1.2 million, respectively, of costs associated with assets not yet placed into service.

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Depreciation expense recorded in the condensed consolidated statements of operations was $1.0 million and $0.8 million for the three months ended September 30, 2018 and 2017, respectively, and $3.1 million and $1.8 million for the nine months ended September 30, 2018 and 2017, respectively.
8. Goodwill, Customer Relationships and Trademarks
Goodwill, customer relationships and trademarks consist of the following amounts (in thousands):
 
September 30, 2018
December 31, 2017
Goodwill
$
120,343

$
120,154

Customer relationships - Acquired


Cost
$
99,402

$
93,371

Accumulated amortization
(58,671
)
(46,681
)
Customer relationships - Acquired, net
$
40,731

$
46,690

Customer relationships - Other


Cost
$
14,080

$
12,336

Accumulated amortization
(8,204
)
(5,534
)
Customer relationships - Other, net
$
5,876

$
6,802

Trademarks


Cost
$
9,770

$
9,770

Accumulated amortization
(2,023
)
(1,212
)
Trademarks, net
$
7,747

$
8,558



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


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

6,205

1,744


Adjustments (1)
189

(174
)


Amortization

(11,990
)
(2,670
)
(811
)
Balance at September 30, 2018
$
120,343

$
40,731

$
5,876

$
7,747

(1) Related to Spark's agreement to working capital balances with Verde Companies and HIKO sellers. Refer to Note 4 "Acquisitions."

Estimated future amortization expense for customer relationships and trademarks at September 30, 2018 is as follows (in thousands):
Year ending December 31,

2018
$
5,877

2019
16,958

2020
11,692

2021
10,118

2022
5,907

> 5 years
3,802

Total
$
54,354


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9. Debt
Debt consists of the following amounts as of September 30, 2018 and December 31, 2017 (in thousands):

September 30, 2018
 
December 31, 2017
Current:
 
 
 
  Senior Credit Facility—Bridge Loan (2)
$

 
$
7,500

  Note Payable—Verde
10,535

 
13,443

Total current portion of debt
10,535

 
20,943

Long-term debt:
 
 
 
  Senior Credit Facility (1) (2)
112,000

 
117,750

  Subordinated Debt
10,000

 

  Note Payable—Verde

 
7,051

Total long-term debt
122,000

 
124,801

Total debt
$
132,535

 
$
145,744

(1) As of September 30, 2018 and December 31, 2017, we had $61.2 million and $47.2 million in letters of credit issued, respectively.
(2) As of September 30, 2018 and December 31, 2017, the weighted average interest rate on the Senior Credit Facility was 5.13% and 4.61%, respectively.

Capitalized financing costs associated with our Senior Credit Facility were $1.5 million and $1.6 million as of September 30, 2018 and December 31, 2017, respectively. Of these amounts, $1.5 million and $1.2 million are recorded in other current assets, and zero and $0.4 million are recorded in other non-current assets in the condensed consolidated balance sheet as of September 30, 2018 and December 31, 2017, respectively.
Interest expense consists of the following components for the periods indicated (in thousands):

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

2018
 
2017
 
2018
 
2017
Senior Credit Facility
$
1,423

 
$
988

 
$
3,895

 
$
2,216

Convertible subordinated notes to affiliate

 

 

 
1,052

Subordinated debt
13

 
153

 
20

 
161

Verde promissory note
288

 
162

 
978

 
162

Accretion related to Earnouts

 
1,127

 

 
3,787

Letters of credit and commitment fees
407

 
214

 
1,187

 
632

Amortization of deferred financing costs 
631

 
219

 
1,243

 
750

Interest Expense
$
2,762

 
$
2,863

 
$
7,323

 
$
8,760


Senior Credit Facility

On May 19, 2017, the Company, as guarantor, and Spark HoldCo (the “Borrower” and, together with each subsidiary of Spark HoldCo (the “Co-Borrowers”), entered into a senior secured borrowing base credit facility (as amended, the “Senior Credit Facility”) in an aggregate amount of $120.0 million. The Verde Companies and HIKO became Co-Borrowers upon the completion of our acquisition of these companies.

During November 2017, January 2018, and July 2018, the Company and Co-Borrowers entered into amendments to the Senior Credit Facility to increase commitments under the facility. In connection with the increase in commitments, the various limits on advances for Working Capital Loans, Letters of Credit and Bridge Loans were increased accordingly. Subject to applicable sublimits and terms of the Senior Credit Facility, as amended, borrowings are available for the issuance of letters of credit (“Letters of Credit”), working capital and general purpose revolving credit loans up to $250.0 million (“Working Capital Loans”), and bridge loans up to $62.5 million (“Bridge Loans”) for the purpose of partial funding for acquisitions. Borrowings under the Senior Credit

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Facility may be used to 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 our Class A common stock and Series A Preferred Stock.

As of September 30, 2018, we had a maximum borrowing capacity of $192.5 million and $112.0 million outstanding under the Senior Credit Facility, as well as $61.2 million of outstanding letters of credit.

The Senior Credit Facility, as amended, will mature on May 19, 2020, and all amounts outstanding thereunder will be payable on the maturity date. Borrowings under the Bridge Loan sublimit, if any, will be repaid 25% per year on a quarterly basis (or 6.25% per quarter), with the remainder due at maturity. As of September 30, 2018, there were no Bridge Loans outstanding.

At our election, the interest rate for Working Capital Loans and Letters of Credit under the Senior Credit Facility is generally determined by reference to the Eurodollar rate plus an applicable margin of up to 3.00% per annum (based on the prevailing utilization) or an alternate base rate plus an applicable margin of up to 2.00% per annum (based on the prevailing utilization). The alternate base rate is equal to the highest of (i) the prime rate (as published in the Wall Street Journal), (ii) the federal funds rate plus 0.50% per annum, or (iii) the reference Eurodollar rate plus 1.00%.

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

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

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

Minimum Fixed Charge Coverage Ratio. We must maintain a minimum fixed charge coverage ratio of not less than 1.25 to 1.00. The Fixed Charge Coverage Ratio is defined as the ratio of (a) Adjusted EBITDA to (b) the sum of consolidated (with respect to the Company and the Co-Borrowers) interest expense (other than interest paid-in-kind in respect of any subordinated debt but including interest in respect of that certain promissory note made by CenStar in connection with the permitted acquisition from Verde Energy USA Holdings, LLC, letter of credit fees, commitment fees, acquisition earn-out payments (excluding earnout payments funded with proceeds from newly issued preferred or common equity), distributions, the aggregate amount of repurchases of our Class A common stock, Series A Preferred Stock, or commitments for such purchases, taxes and scheduled amortization payments.

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

Maximum Senior Secured Leverage Ratio. We must maintain a Senior Secured Leverage Ratio of no more than 1.85 to 1.00. The Senior Secured Leverage Ratio is defined as the ratio of (a) all indebtedness of the loan parties on a consolidated basis that is secured by a lien on any property of any loan party (including the effective amount of all loans then outstanding (but, in any case, limited to 50% of the effective amount of letter of credit obligations attributable to performance standby letters of credit) but excluding subordinated debt permitted by the Credit Agreement as amended by the Amendment) to (b) Adjusted EBITDA.


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Table of Contents

The Senior Credit Facility contains various negative covenants that limit our ability to, among other things, incur certain additional indebtedness, grant certain liens, engage in certain asset dispositions, merge or consolidate, make certain payments, distributions, investments, acquisitions or loans, materially modify certain agreements, or enter into transactions with affiliates.

In addition, the Senior Credit Facility also contains affirmative covenants that are customary for credit facilities of this type. As of September 30, 2018, we are in compliance with our various covenants under the Senior Credit Facility.

The Senior Credit Facility is secured by pledges of the equity of the portion of Spark HoldCo owned by us, the equity of Spark HoldCo’s subsidiaries, the Co-Borrowers’ present and future subsidiaries, and substantially all of the Co-Borrowers’ and their subsidiaries’ present and future property and assets, including accounts receivable, inventory and liquid investments, and control agreements relating to bank accounts.

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

The Senior Credit Facility contains certain customary representations and warranties and events of default. Events of default include, among other things, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults and cross-acceleration to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments in excess of $5.0 million, certain events with respect to material contracts, 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.

Subordinated Debt Facility

On December 27, 2016, the Company 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. We have the right to capitalize interest payments under the subordinated note. The subordinated note is subordinated in certain respects to our Senior Credit Facility pursuant to a subordination agreement. We may pay interest and prepay principal on the subordinated note so long as we are 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.

Verde Companies Promissory Note

In connection with the acquisition of the Verde Companies, on July 1, 2017, we entered into a Promissory Note in the aggregate principal amount of $20.0 million (the "Verde Promissory Note"). The Verde Promissory Note

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Table of Contents

required repayment in 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 us.

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 Promissory Note”), which amended and restated the Verde Promissory Note. The Amended and Restated Verde Promissory Note, effective January 12, 2018, matures in January 2019, and bears interest at a rate of 9% per annum beginning January 1, 2018. Principal and interest are payable monthly on the first day of each month in which the Amended and Restated Verde Promissory Note is outstanding. CenStar deposits 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 was increased from the Verde Promissory Note. As of December 31, 2017, there was $14.6 million outstanding under the Verde Promissory note, and as of September 30, 2018, there was $4.6 million outstanding under the Amended and Restated Verde Promissory Note.

Verde Earnout Termination Note

On January 12, 2018, we issued a promissory note in the principal amount of $5.9 million in connection with an agreement to terminate the earnout obligations arising in connection with our acquisition of the Verde Companies (the “Verde Earnout Termination Note”). The Verde Earnout Termination Note 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. Interest is payable monthly on the first day of each month in which the Verde Earnout Termination Note is outstanding. The principal and any outstanding interest is due on June 30, 2019.
10. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. This includes the credit standing of counterparties involved and the impact of credit enhancements.
We apply fair value measurements to our commodity derivative instruments and contingent payment arrangements based on the following fair value hierarchy, which prioritizes the inputs to the valuation techniques used to measure fair value into three broad levels:

Level 1—Quoted prices in active markets for identical assets and liabilities. Instruments categorized in Level 1 primarily consist of financial instruments such as exchange-traded derivative instruments.
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 our acquisitions.
Other Financial Instruments

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Table of Contents

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 our line of credit, and are considered Level 2 measurements because interest rates charged are similar to other financial instruments with similar terms and maturities. The fair value of our convertible subordinated notes to affiliates and the payable pursuant to tax receivable agreement—affiliate is not determinable for accounting purposes due to the affiliate nature and terms of the associated agreements 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 our condensed consolidated balance sheets on a recurring basis by and their level within the fair value hierarchy (in thousands):

Level 1

Level 2

Level 3

Total
September 30, 2018
 

 

 

 
Non-trading commodity derivative assets
$
223


$
25,077


$


$
25,300

Trading commodity derivative assets







Total commodity derivative assets
$
223


$
25,077


$


$
25,300

Non-trading commodity derivative liabilities
$
(63
)

$
(502
)

$


$
(565
)
Trading commodity derivative liabilities
(189
)

(4
)



(193
)
Total commodity derivative liabilities
$
(252
)

$
(506
)

$


$
(758
)
Contingent payment arrangement
$

 
$

 
$
(2,980
)
 
$
(2,980
)


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
)
We had no transfers of assets or liabilities between any of the above levels during the nine months ended September 30, 2018 and the year ended December 31, 2017.
Our derivative contracts include exchange-traded contracts valued utilizing readily available quoted market prices and non-exchange-traded contracts valued using market price quotations available through brokers or over-the-counter and on-line exchanges. In addition, in determining the fair value of our derivative contracts, we apply a credit risk valuation adjustment to reflect credit risk, which is calculated based on the Company’s or the counterparty’s historical credit risks. As of September 30, 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 our acquisition of the Major Energy Companies in 2016. Of these amounts, $3.0 million and $4.0 million were classified as current liabilities as of September 30, 2018 and December 31, 2017, respectively, and zero and $0.6 million were classified as long-term liabilities as of September 30, 2018 and December 31, 2017, respectively.

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Table of Contents

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, we forecasted certain expected performance targets and calculated the probability of such forecast being attained. For the nine months ended September 30, 2018 and 2017, we paid $1.6 million and $7.4 million, respectively, related to the Major Earnout. We have 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 nine months ended September 30, 2018.


Major Earnout and Stock Earnout
Fair Value at December 31, 2017

$
4,650

Change in fair value of contingent consideration, net

(63
)
Payments and settlements

(1,607
)
Fair Value at September 30, 2018

$
2,980

11. Accounting for Derivative Instruments

We are exposed to the impact of market fluctuations in the price of electricity and natural gas, basis differences in the price of natural gas, storage charges, Renewable Energy Credits, capacity charges from independent system operators, and other ancillary costs. We use derivative instruments in an effort to manage our cash flow exposure to these risks. These instruments are not designated as hedges for accounting purposes, and accordingly, changes in the market value of these derivative instruments are recorded in the cost of revenues. As part of our strategy to optimize pricing in our natural gas related activities, we manage a portfolio of commodity derivative instruments held for trading purposes. Our commodity trading activities are subject to limits within our Risk Management Policy. For these derivative instruments, changes in the fair value are recognized currently in earnings in net asset optimization revenues.
Derivative assets and liabilities are presented net in our condensed consolidated balance sheets when the derivative instruments are executed with the same counterparty under a master netting arrangement. Our derivative contracts include transactions that are executed both on an exchange and centrally cleared as well as over-the-counter, bilateral contracts that are transacted directly with a third party. To the extent we have paid or received collateral related to the derivative assets or liabilities, such amounts would be presented net against the related derivative asset or liability’s fair value. As of September 30, 2018 and December 31, 2017, we had paid zero and $0.1 million in collateral outstanding, respectively. The specific types of derivative instruments we may execute to manage the commodity price risk include the following:

Forward contracts, which commit us to purchase or sell energy commodities in the future;
Futures contracts, which are exchange-traded standardized commitments to purchase or sell a commodity or financial instrument;
Swap agreements, which require payments to or from counterparties based upon the differential between two prices for a predetermined notional quantity; and
Option contracts, which convey to the option holder the right but not the obligation to purchase or sell a commodity.

Interest Rate Swaps

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Table of Contents


During the three months ended September 30, 2018, we entered into two interest rate swap agreements to manage interest rate risk. The interest rate swap agreements were not designated as hedges for accounting purposes. As such, all changes in fair value were recognized in earnings, within interest and other income. As of September 30, 2018, the notional amount of the interest swap was $10.0 million. A fair value liability of less than $0.1 million was recorded in other current liabilities on the condensed consolidated balance sheet as of September 30, 2018.

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

September 30, 2018

December 31, 2017
Natural Gas
MMBtu

6,099


9,191

Natural Gas Basis
MMBtu

140



Electricity
MWh

5,980


8,091

Trading
Commodity
Notional

September 30, 2018

December 31, 2017
Natural Gas
MMBtu

221


26

Natural Gas Basis
MMBtu

78


(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):

Three Months Ended September 30,
  
2018

2017
Gain (loss) on non-trading derivatives, net
$
17,888


$
(2,568
)
Gain (loss) on trading derivatives, net
229


(184
)
Gain (loss) on derivatives, net
18,117


(2,752
)
Current period settlements on non-trading derivatives (1)
1,035


7,481

Current period settlements on trading derivatives
(113
)

(24
)
Total current period settlements on derivatives
$
922


$
7,457

(1) Excludes settlements of $0.1 million and $1.5 million, respectively, for the three months ended September 30, 2018 and 2017 related to non-trading derivative liabilities assumed in various acquisitions.

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Table of Contents


Nine Months Ended September 30,
  
2018

2017
Loss on non-trading derivatives, net
$