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, 2014 ,
 
o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to          
 
Commission File Number: 001-36559
Spark Energy, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
Delaware
 
 
 
46-5453215
(State or other jurisdiction of
incorporation or organization)
 
 
 
(I.R.S. Employer
Identification No.)
2105 CityWest Blvd., Suite 100
Houston, Texas 77042

(Address of principal executive offices)
 
(713) 600-2600
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes o     No x
The registrant became subject to such requirements on July 28, 2014 and has filed all reports required since that date.
 

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

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

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

There were 3,000,000 shares of Class A common stock, 10,750,000 shares of Class B common stock and no shares of preferred stock outstanding as of November 11, 2014.



PART I. FINANCIAL INFORMATION
 
 
ITEM 1. FINANCIAL STATEMENTS
 
 
 
 
 
CONDENSED COMBINED AND CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2014 AND DECEMBER 31, 2013 (unaudited)

 
 
 
 
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 (unaudited)
 
 
 
 
CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 (unaudited)

 
 
 
 
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 (unaudited)
 
 
 
 
NOTES TO THE CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
 
 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
ITEM 4. CONTROLS AND PROCEDURES
 
PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
ITEM 1A. RISK FACTORS
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
ITEM 4. MINE SAFETY DISCLOSURES
 
ITEM 5. OTHER INFORMATION
 
ITEM 6. EXHIBITS
 
APPENDIX A
 
SIGNATURES
 
EXHIBIT INDEX
 


1
Table of Contents

PART 1. — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SPARK ENERGY, INC.
CONDENSED COMBINED AND CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2014 AND DECEMBER 31, 2013
(in thousands)
(unaudited)
 
September 30, 2014
 
December 31, 2013
 

 
 
Assets

 

Current assets:

 

Cash and cash equivalents
$
2,483

 
$
7,189

Accounts receivable, net of allowance for doubtful accounts
48,963

 
62,678

Accounts receivable-affiliates
484

 
6,794

Inventory
9,659

 
4,322

Fair value of derivative assets
900

 
8,071

Customer acquisition costs
14,658

 
4,775

Prepaid assets
1,303

 
1,032

Deposits
4,123


3,529

Other current assets
6,114

 
2,901

Total current assets
88,687

 
101,291

Property and equipment, net
4,437

 
4,817

Fair value of derivative assets
11

 
6

Customer acquisition costs
5,736

 
2,901

Deferred tax assets
22,999


—

Other assets
204

 
58

Total Assets
$
122,074

 
$
109,073

Liabilities and Stockholders' Equity

 

Current liabilities:

 

Accounts payable
$
33,694

 
$
36,971

Accounts payable-affiliates
851

 
—

Accrued liabilities
4,349

 
6,838

Fair value of derivative liabilities
1,601

 
1,833

Note payable
20,500

 
27,500

Other current liabilities
1,465


—

Total current liabilities
62,460

 
73,142

Long-term liabilities:


 


Fair value of derivative liabilities
74

 
18

Payable pursuant to tax receivable agreement-affiliates
20,915


—

Other long-term liabilities
107


—

Total liabilities
83,556

 
73,160

Commitments and contingencies (Note 10)





Stockholders' equity:





       Member's equity
—


35,913

       Common Stock:





Class A common stock, par value $0.01 per share, 120,000,000 shares authorized, zero issued and outstanding at December 31, 2013 and 3,000,000 issued and outstanding at September 30, 2014
30


—

Class B common stock, par value $0.01 per share, 60,000,000 shares authorized, zero issued and outstanding at December 31, 2013 and 10,750,000 issued and outstanding at September 30, 2014
108


—

        Preferred Stock:





Preferred stock, par value $0.01 per share, 20,000,000 shares authorized, zero issued and outstanding at December 31, 2013 and September 30, 2014
—


—

        Additional paid-in capital
8,998


—

        Retained earnings
1,061


—

       Total stockholders' equity
10,197


35,913

Non-controlling interest in Spark HoldCo, LLC
28,321


—

       Total equity
38,518


35,913

Total Liabilities and Stockholders' Equity
$
122,074


$
109,073


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

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Table of Contents

SPARK ENERGY, INC.
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(in thousands, except per share data)
(unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2014

2013

2014

2013
Revenues:







Retail revenues (including retail revenues-affiliates of $0 and $2,460 for the three months ended September 30, 2014 and 2013, respectively, and retail revenues-affiliates of $2,170 and $2,970 for the nine months ended September 30, 2014 and 2013, respectively)
$
68,358


$
69,882


$
238,453


$
237,598

Net asset optimization revenues (expenses) (including asset optimization revenues-affiliates of $3,208 and $5,107 for the three months ended September 30, 2014 and 2013, respectively, and $10,341 and $7,872 for the nine months ended September 30, 2014 and 2013, respectively, and asset optimization revenues affiliates cost of revenues of $6,450 and $3,344 for the three months ended September 30, 2014 and 2013, respectively, and $25,004 and $2,841 for the nine months ended September 30, 2014 and 2013, respectively)
(141
)

17


1,681


(2,922
)
Total Revenues
68,217


69,899


240,134


234,676

Operating Expenses:







Retail cost of revenues (including retail cost of revenues-affiliates of less than $0.1 million for both the three and nine months ended September 30, 2014 and 2013)
51,863


60,042


192,371


182,441

General and administrative (including general and administrative expense-affiliates of $0.1 million for both the three and nine months ended September 30, 2014)
10,634


7,577


28,494


26,289

Depreciation and amortization
4,113


3,390


10,324


12,704

Total Operating Expenses
66,610


71,009


231,189


221,434

Operating income (loss)
1,607


(1,110
)

8,945


13,242

Other (expense)/income:







Interest expense
(615
)

(597
)

(1,150
)

(1,267
)
Interest and other income
40


124


111


135

Total other expenses
(575
)

(473
)

(1,039
)

(1,132
)
Income (loss) before income tax expense
1,032


(1,583
)

7,906


12,110

Income tax expense
613


14


777


42

Net income (loss)
$
419


$
(1,597
)

$
7,129


$
12,068

Less: Net income (loss) attributable to non-controlling interests
(642
)

—


6,068


—

Net income (loss) attributable to Spark Energy, Inc. stockholders
$
1,061


$
(1,597
)

$
1,061


$
12,068

Other comprehensive income (loss):







       Deferred gain from cash flow hedges
—


—


—


2,620

Reclassification of deferred gain from cash flow hedges into net income (Note 6)
—


—


—


(84
)
               Comprehensive income (loss)
$
419


$
(1,597
)

$
7,129


$
14,604









Net income attributable to Spark Energy, Inc. per common share







       Basic
$
0.35





$
0.35




       Diluted
$
0.03





$
0.35














Weighted average commons shares outstanding









       Basic
3,000





3,000




       Diluted
13,750





3,000





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


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Table of Contents

SPARK ENERGY, INC.
CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
(in thousands)
(unaudited)

Member's Equity
Issued Shares of Class A Common Stock
Issued Shares of Class B Common Stock
Issued Shares of Preferred Stock
Class A Common Stock
Class B Common Stock
Additional Paid In Capital
Retained Earnings
Total Stockholders Equity
Non-controlling Interest
Total Equity
Balance at 12/31/13:
$
35,913

—

—

—

—

—

—

—

—

—

$
35,913

Capital contributions from member and liabilities retained by affiliate
54,201

—

—

—

—

—

—

—

—

—

54,201

Distribution to member
(61,607
)
—

—

—

—

—

—

—

—

—

(61,607
)
Net loss prior to the Offering
(21
)
—

—

—

—

—

—

—

—

—

(21
)
Balance prior to Corporate Reorganization and the Offering:
28,486

—

—

—

—

—

—

—

—

—

28,486

Reorganization Transaction:






 














Issuance of Class B common stock
(28,486
)
—

10,750

—

—

$
108

$
28,378

—

$
28,486

—

—

Offering Transactions:






 














Offering costs paid
—

—

—

—

—

—

(2,667
)
—

(2,667
)
—

(2,667
)
Issuance of Class A Common Stock, net of underwriters discount
—

3,000

—

—

$
30

—

50,190

—

50,220

—

50,220

Distribution of Offering proceeds and payment of note payable to affiliate
—

—

—

—

—

—

(47,604
)
—

(47,604
)
—

(47,604
)
Initial allocation of non-controlling interest of Spark Energy, Inc. effective on date of Offering
—

—

—

—

—

—

(22,232
)
—

(22,232
)
$
22,232

—

Tax benefit from tax receivable agreement
—

—

—

—

—

—

23,636

—

23,636

—

23,636

Liability due to tax receivable agreement
—

—

—

—

—

—

(20,915
)
—

(20,915
)
—

(20,915
)
Balance at inception of public company (8/1/2014):
—

3,000

10,750

—

30

108

8,786

—

8,924

22,232

31,156

Stock based compensation
—

—

—

—

—

—

212

—

212

—

212

Consolidated net income subsequent to the Offering
—

—

—

—

—

—

—

$
1,061

1,061

6,089

7,150

Balance at 9/30/14:
$
—

3,000

10,750

$
—

$
30

$
108

$
8,998

$
1,061

$
10,197

$
28,321

$
38,518

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


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Table of Contents

SPARK ENERGY, INC.
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(in thousands)
(unaudited)  
  
Nine Months Ended September 30,
  
2014

2013
 


 
Cash flows from operating activities:



Net income
$
7,129


$
12,068

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



Depreciation and amortization expense
10,324


12,704

Deferred income taxes
638


—

Stock based compensation
362


—

Amortization and write off of deferred financing costs
580


501

Allowance for doubtful accounts and bad debt expense
3,973


1,626

Gain on derivatives, net
(262
)

(2,040
)
Current period cash settlements on derivatives, net
7,252


1,876

Changes in assets and liabilities:



Decrease in accounts receivable
9,741


23,265

Decrease in accounts receivable-affiliates
6,310


4,998

Increase in inventory
(5,338
)

(2,051
)
Increase in customer acquisition costs
(20,366
)

(3,112
)
Increase in prepaid and other current assets
(4,658
)

(1,227
)
Increase in other assets
(146
)

(7
)
Decrease in accounts payable and accrued liabilities
(5,890
)

(14,309
)
Increase in accounts payable-affiliates
851


—

Increase (decrease) in other liabilities
1,465


(517
)
Net cash provided by operating activities
11,965


33,775

Cash flows from investing activities:



Purchases of property and equipment
(2,214
)

(986
)
Net cash used in investing activities
(2,214
)

(986
)
Cash flows from financing activities:



Borrowings on notes payable
60,280


44,500

Payments on notes payable
(38,280
)

(43,500
)
Member contributions
25,201


—

Member distributions
(61,607
)

(38,055
)
       Proceeds from issuance of Class A common stock
50,220


—

       Distributions of proceeds from Offering to affiliate
(47,554
)

—

       Payment of Note Payable to NuDevco
(50
)

—

       Offering costs
(2,667
)

—

Net cash used in financing activities
(14,457
)

(37,055
)
Decreases in cash and cash equivalents
(4,706
)

(4,266
)
Cash and cash equivalents—beginning of period
7,189


6,558

Cash and cash equivalents—end of period
$
2,483


$
2,292

Supplemental Disclosure of Cash Flow Information:



Non cash items:
 
 
 
       Issuance of Class B common stock
$
28,486

 
$
—

       Liabilities retained by affiliate
29,000

 
—

       Liability due to tax receivable agreement
23,636

 
—

       Tax benefit from tax receivable agreement
20,915

 
—

       Initial allocation of non-controlling interest
22,232

 
—

       Property and equipment purchase accrual
81

 
—

Cash paid during the period for:
 
 
 
Interest
$
484

 
$
1,500

Taxes
$
150

 
$
195

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

5
Table of Contents

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

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

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

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


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Table of Contents

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

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

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

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

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


Shares of


common stock







Number

Percent Voting Interest
Publicly held Class A common stock

3,000,000


21.82
%
Class B common stock held by NuDevco Retail Holdings, LLC and NuDevco Retail, LLC

10,750,000


78.18
%
Total

13,750,000


100.00
%
Credit Facility
Concurrently with the closing of the Offering, the Company entered into a new $70.0 million senior secured credit facility. See Note 4 "Long-Term Debt" for further discussion.
Exchange and Registration Rights
NuDevco has the right to exchange (the “Exchange Right”) all or a portion of its Spark HoldCo units (together with a corresponding number of shares of Class B common stock) for Class A common stock (or cash at Spark Energy, Inc.’s or Spark HoldCo’s election (the “Cash Option”)) at an exchange ratio of one share of Class A common stock for each Spark HoldCo unit (and corresponding share of Class B common stock) exchanged. In addition, NuDevco has the right, under certain circumstances, to cause the Company to register the offer and resale of NuDevco's shares of Class A common stock obtained pursuant to the Exchange Right.

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Table of Contents


Tax Receivable Agreement

Concurrently with the closing of the Offering, the Company entered into a Tax Receivable Agreement with Spark HoldCo, NuDevco Retail Holdings and NuDevco Retail. See Note 11 "Transactions with Affiliates" for further discussion.

Other Transactions in Connection with the Consummation of the Offering
In connection with the Offering the following restructuring transactions occurred:

•
SEG and SE were converted from limited partnerships into limited liability companies;
•
SEG, SE and an affiliate entered into an interborrower agreement, pursuant to which such affiliate agreed to be solely responsible for $29.0 million of the outstanding indebtedness. SE and SEG repaid their outstanding indebtedness of $10.0 million and borrowed $10.0 million under the Company's Senior Credit Facility,
•
NuDevco Retail Holdings contributed all of its interests in SEG and SE to Spark HoldCo in exchange for all of the outstanding units of Spark HoldCo and transferred 1% of those Spark HoldCo units to NuDevco Retail;
•
NuDevco Retail Holdings transferred Spark HoldCo units to the Company for the $50,000 NuDevco Note and the limited liability company agreement of Spark HoldCo was amended and restated to admit the Company as its sole managing member.

Following the Offering, the Company purchased 2,997,222 Spark HoldCo units from NuDevco Retail Holdings and repaid the NuDevco Note. The 2,997,222 Spark Holdco units we purchased with the proceeds from the Offering, together with the 2,778 Spark HoldCo units we purchased in exchange for the NuDevco Note prior to the Offering, represent a 21.82% ownership interest in Spark HoldCo. After giving effect to these transactions and the Offering, the Company owns an approximate  21.82% interest in Spark HoldCo, NuDevco Retail Holdings owns an approximate 77.18% interest in Spark HoldCo and 10,612,500 shares of Class B common stock and NuDevco Retail owns a 1% interest in Spark HoldCo and 137,500 shares of Class B common stock.

Each share of Class B common stock, all of which is held by NuDevco, has no economic rights but entitles its holder to one vote on all matters to be voted on by shareholders generally. Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to our shareholders for their vote or approval, except as otherwise required by applicable law or by our certificate of incorporation.
2. Basis of Presentation
The accompanying interim unaudited condensed combined and consolidated financial statements (“interim statements”) of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the interim financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Effects on the business, financial condition and results of operations resulting from revisions to estimates are recognized when the facts that give rise to the revision become known. The information furnished herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the condensed combined and consolidated financial statements. Operating results for the three and  nine months ended September 30, 2014  are not necessarily indicative of the results which may be expected for the full year or for any interim period. 

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The accompanying interim unaudited condensed combined and consolidated financial statements have been prepared in accordance with Regulation S-X, Article 3, General Instructions as to Financial Statements and Staff Accounting Bulletin (“SAB”) Topic 1-B, Allocations of Expenses and Related Disclosures in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity on a stand-alone basis and are derived from SE’s and SEG’s historical basis in the assets and liabilities before the Offering and Spark Energy Inc.'s financial results after the Offering, and include all revenues, costs, assets and liabilities attributable to the retail natural gas and asset optimization and retail electricity businesses of SE and SEG for the periods prior to the Offering that are specifically identifiable or have been allocated to the Company. Management has made certain assumptions and estimates in order to allocate a reasonable share of expenses to the Company, such that the Company’s consolidated financial statements reflect substantially all of its costs of doing business. The Company also enters into transactions with and pays certain costs on behalf of affiliates under common control in order to reduce risk, reduce administrative expense, create economies of scale, create strategic alliances and supply goods and services to these related parties. The Company direct bills certain expenses incurred on behalf of affiliates or allocates certain overhead expenses to affiliates associated with general and administrative services based on services provided, departmental usage, or headcount, which are considered reasonable by management. The allocations and related estimates and assumptions are described more fully in Note 11 “Transactions with Affiliates”. These costs are not necessarily indicative of the cost that the Company would have incurred had it operated as an independent stand-alone entity prior to the Offering. Affiliates have also relied upon Spark Energy Ventures as a participant in the credit facility for periods prior to the Offering as described more fully in Note 4 “Long-Term Debt”. As such, the Company’s interim unaudited condensed combined and consolidated financial statements do not fully reflect what the Company’s financial position, results of operations and cash flows would have been had the Company operated as an independent stand-alone company prior to the Offering. As a result, historical financial information prior to the Offering is not necessarily indicative of what the Company’s results of operations, financial position and cash flows will be in the future. The Company's unaudited condensed consolidated financial statements subsequent to the Offering are presented on a consolidated basis and include all wholly-owned and controlled subsidiaries.

Transactions with Affiliates

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

Subsequent Events

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

Recent Accounting Pronouncements


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

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

Estimated 
useful
lives (years)

September 30, 2014

December 31, 2013
Information technology
2 – 5

$
24,824


$
22,529

Leasehold improvements
2 – 5

4,568


4,568

Furniture and fixtures
2 – 5

998


998

Total


30,390


28,095

Accumulated depreciation


(25,953
)

(23,278
)
Property and equipment—net


$
4,437


$
4,817

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, 2014 and December 31, 2013 , information technology includes $2.2 million and $1.3 million , respectively, of costs associated with assets not yet placed into service.
Depreciation expense recorded in the condensed combined and consolidated statements of operations was $0.8 million and $1.4 million for the three months ended September 30, 2014 and 2013, respectively, and $2.7 million and $4.5 million for the nine months ended September 30, 2014 and 2013, respectively.
4. Long-Term Debt
In October 2007, Spark Energy Ventures and all of its subsidiaries (collectively, the “Borrowers”), entered into a credit agreement, consisting of a working capital facility, a term loan and a revolving credit facility (the “Credit Agreement”), with SE and SEG as co-borrowers under which they were jointly and severally liable for amounts Borrowers borrowed under the Credit Agreement. The Credit Agreement was secured by substantially all of the assets of Spark Energy Ventures and its subsidiaries.
The Credit Agreement was amended on May 30, 2008 to provide for a $177.5 million working capital facility, a $100 million term loan, and a $35 million revolving credit facility. On January 24, 2011, the Borrowers amended and restated the Credit Agreement (the “Fifth Amended Credit Agreement”) to decrease the working capital facility to $150 million , to increase the term loan to $130 million and to eliminate the revolving credit facility.
On December 17, 2012, the Borrowers amended and restated the Fifth Amended Credit Agreement to decrease the working capital facility to $70 million , to decrease the term loan to $125 million and to reinstate the revolving credit facility in the amount of $30 million (the “Sixth Amended Credit Agreement”). The Sixth Amended Credit Agreement was scheduled to mature on December 17, 2014.
On July 31, 2013 and in conjunction with the initial public offering of Marlin Midstream Partners, LP (“Marlin”), which was formerly a wholly owned subsidiary of Spark Energy Ventures, the Sixth Amended Credit Agreement

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was amended and restated to increase the working capital facility to $80 million and eliminate the term loan and revolving credit facility (the “Seventh Amended Credit Agreement”) and to remove Marlin as a party to the Credit Agreement. The Seventh Amended Credit Agreement was scheduled to mature on July 31, 2015. The Seventh Amended Credit Agreement continued to be secured by the assets of Spark Energy Ventures and its subsidiaries through completion of the Offering.
Although SE and SEG, as wholly owned subsidiaries of Spark Energy Ventures, were jointly and severally liable for Marlin’s borrowing under the Sixth Amended Credit Agreement prior to the Marlin initial public offering, SE and SEG did not historically have access to or use the term loan and the revolving credit facility utilized by Marlin. SE and SEG were the primary recipients of the proceeds from the working capital facility.
The Company adopted ASU 2013-04, which prescribes the accounting for joint and several liability arrangements early and applied the accounting in the guidance condensed combined and consolidated financial statements prior to the Offering as required by the standard. This guidance requires an entity to measure its obligation resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. Based on the Sixth Amended Credit Agreement prior to the Marlin initial public offering and understanding among the Borrowers, the term loan and the revolving credit facility were assigned specifically to Marlin. The Company has recognized the proceeds from the working capital facility in its condensed combined and consolidated financial statements prior to the Offering, which represented the amounts the Company with the other Borrowers agreed to pay, and the amounts the Company expected to pay.
Working Capital Facility
The working capital facility was $150 million in 2012 under the Fifth Amended Credit Agreement and was later amended to $70 million on December 17, 2012 under the Sixth Amended Credit Agreement. On July 31, 2013, and in conjunction with the Seventh Amended Credit Agreement, the working capital facility was increased to $80 million and was scheduled to mature on July 31, 2015.
The working capital facility was available for use by Spark Energy Ventures and its affiliates to finance the working capital requirements related to the purchase and sale of natural gas, electricity, and other commodity products not related to the retail natural gas and asset optimization and retail electricity businesses of the Company. The Company’s condensed combined and consolidated financial statements include the total amounts outstanding under the working capital facility of $27.5 million as of December 31, 2013 , which is classified as current in the condensed combined balance sheet as the working capital facility was drawn upon and repaid on a monthly basis to fund working capital needs. Portions of the borrowings were used to fund equity distributions to the sole member of the Company to fund unrelated operations of an affiliate under the common control of the sole member prior to the Offering. The total amounts outstanding under the facility as of December 31, 2013 and through the Offering date included $17.5 million and $29.0 million , respectively that was retained and paid off by an affiliate in connection with the Offering.
Further, through the issuance of letters of credit, the Company was able to secure payment to suppliers. No obligation is recorded for such outstanding letters of credit unless they are drawn upon by the suppliers and in the event a supplier draws on a letter of credit, repayment is due by the earlier of demand by the bank or at the expiration of the applicable Credit Agreement. Letters of credit issued and outstanding as of December 31, 2013 were $10.0 million .
Under the working capital facility, the Company paid a fee with respect to each letter of credit issued and outstanding. The Company incurred fees on letters of credit issued and outstanding totaling $0.1 million for both of the three months ended September 30, 2014 and 2013, and $0.3 million and $0.4 million , for the nine months ended September 30, 2014 and 2013, respectively, which is recorded in interest expense in the condensed combined and consolidated statements of operations.

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Under the Sixth Amended Credit Agreement, the Company was able to elect to have loans under the working credit facility bear interest either (i) at a Eurodollar-based rate plus a margin ranging from 3.00% to 3.75% depending on the Company’s consolidated funded indebtedness ratio then in effect, or (ii) at a base rate loan plus a margin ranging from 2.00% to 2.75% depending on the Company’s consolidated funded indebtedness ratio then in effect. The Company also paid a nonutilization fee equal to 0.50% per annum.
Under the Seventh Amended Credit Agreement, the Company was able to elect to have loans under the working capital facility bear interest (i) at a Eurodollar-based rate plus a margin ranging from 3.00% to 3.25% , depending on the Spark Energy Ventures’ aggregate amount outstanding then in effect, (ii) at a base rate loan plus a margin ranging from 2.00% to 2.25% , depending on Spark Energy Ventures’ aggregate amount outstanding then in effect or (iii) a cost of funds rate loan plus a margin ranging from 2.50% to 2.75% , depending on Spark Energy Ventures’ aggregate amount outstanding then in effect. Each working capital loan made as a result of a drawing under a letter of credit bears interest on the outstanding principal amount thereof from the date funded at a floating rate per annum equal to the cost of funds rate plus the applicable margin until such loan has been outstanding for more than two business days and, thereafter, bears interest on the outstanding principal amount thereof at a floating rate per annum equal to the base rate plus the applicable margin, plus two percent 2.00% per annum. The Company incurred interest expense of $0.6 million and 0.6 million for the three months ended September 30, 2014 and 2013 , respectively, and $1.2 million and $1.3 million for the nine months ended September 30, 2013, which is recorded in interest expense in the condensed combined and consolidated statements of operations.
The Company also paid a commitment fee equal to 0.50% per annum. The Company incurred commitment fees totaling $0.1 million or less for each of the three and nine months ended September 30, 2014 and 2013 , which is recorded in interest expense in the condensed combined and consolidated statements of operations.
Deferred Financing Costs
Deferred financing costs were $0.4 million (all of which represents capitalized financing costs related to the new Senior Credit Facility entered into on August 1, 2014) and $0.5 million as of September 30, 2014 and December 31, 2013 , respectively. Of these amounts, $0.2 million and $0.4 million is recorded in other current assets in the condensed combined and consolidated balance sheets as of September 30, 2014 and December 31, 2013 , respectively, and $0.2 million and $0.1 million is recorded in other assets in the condensed combined and consolidated balance sheet as of September 30, 2014 and December 31, 2013 , respectively based on the terms of the working capital facilities.
Amortization of deferred financing costs was $0.4 million (which included $0.3 million of capitalized financing costs written off upon extinguishment of the Seventh Amended Credit Facility) and $0.3 million for the three months ended September 30, 2014 and 2013, respectively, and $0.6 million and $0.5 million for the nine months ended September 30, 2014 and 2013, respectively, which is recorded in interest expense in the condensed combined and consolidated statements of operations.
NuDevco Note
NuDevco Retail Holdings transferred Spark HoldCo units to the Company for the $50,000 NuDevco Note, and the limited liability company agreement of Spark HoldCo was amended and restated to admit Spark Energy, Inc. as its sole managing member. This promissory note was repaid in connection with proceeds from the Offering.
New Credit Facility

Concurrently with the closing of the Offering, the Company entered into a new $70.0 million senior secured revolving credit facility ("Senior Credit Facility"), which matures on August 1, 2016. If no event of default has occurred, the Company has the right, subject to approval by the administrative agent and each issuing bank, to increase the commitments under the Senior Credit Facility up to $120.0 million . The Company borrowed approximately $10.0 million under the Senior Credit Facility at the closing of the Offering to repay in full the outstanding indebtedness under the Seventh Amended Credit Agreement that SEG and SE agreed to be responsible

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for pursuant to an interborrower agreement between SEG, SE and an affiliate. The remaining $29.0 million of indebtedness outstanding under the Seventh Amended Credit Agreement at the Offering date was paid down by our affiliate with its own funds concurrent with the closing of the Offering pursuant to the terms of the interborrower agreement. Following this repayment, the Seventh Amended Credit Agreement was terminated. The Company had $15 million in letters of credit issued under the Senior Credit Facility at inception. As of September 30, 2014, the Company had $20.5 million outstanding under the Senior Credit Facility and $11.6 million in letters of credit issued. The Senior Credit Facility is available to fund expansions, acquisitions and working capital requirements for operations and general corporate purposes.

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

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

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

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

The Senior Credit Facility is secured by the capital stock of SE, SEG and Spark HoldCo (the "Co-Borrowers") present and future subsidiaries, all of the Co-Borrowers’ and their subsidiaries’ present and future property and assets, including accounts receivable, inventory and liquid investments, and control agreements relating to bank accounts.
The Senior Credit Facility contains covenants which, among other things, require the Company to maintain certain financial ratios or conditions. At all times, the Company must maintain net working capital, tangible net worth and a leverage ratio to a certain threshold. The Senior Credit Facility also contains negative covenants that limit our ability to, among other things, make certain payments, distributions, investments, acquisitions or loans.
In addition, the Senior Credit Facility contains affirmative covenants that are customary for credit facilities of this type. The covenants include delivery of financial statements (including any filings made with the SEC, maintenance of property and insurance, payment of taxes and obligations, material compliance with laws, inspection of property, books and records and audits, use of proceeds, payments to bank blocked accounts, notice of defaults and certain other customary matters.



13
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5. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. This includes not only the credit standing of counterparties involved and the impact of credit enhancements but also the impact of the Company’s own nonperformance risk on its liabilities.
The Company applies fair value measurements to its commodity derivative instruments based on the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

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







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Derivative Instruments
The following table presents assets and liabilities measured and recorded at fair value in the Company’s condensed combined and consolidated balance sheets on a recurring basis by and their level within the fair value hierarchy as of (in thousands):  

Level 1

Level 2

Level 3

Total
September 30, 2014
 

 

 

 
Non-trading commodity derivative assets
$
—


$
719


$
—


$
719

Trading commodity derivative assets
—


192


—


192

Total commodity derivative assets
$
—


$
911


$
—


$
911

Non-trading commodity derivative liabilities
$
(1,397
)

$
(180
)

$
—


$
(1,577
)
Trading commodity derivative liabilities
(52
)

(46
)

—


(98
)
Total commodity derivative liabilities
$
(1,449
)

$
(226
)

$
—


$
(1,675
)

Level 1

Level 2

Level 3

Total
December 31, 2013







Non-trading commodity derivative assets
$
—


$
4,672


$
—


$
4,672

Trading commodity derivative assets
—


3,405


—


3,405

Total commodity derivative assets
$
—


$
8,077


$
—


$
8,077

Non-trading commodity derivative liabilities
$
(563
)

$
(854
)

$
—


$
(1,417
)
Trading commodity derivative liabilities
147


(581
)

—


(434
)
Total commodity derivative liabilities
$
(416
)

$
(1,435
)

$
—


$
(1,851
)
The Company had no financial instruments measured using level 3 at September 30, 2014 and December 31, 2013 . The Company had no transfers of assets or liabilities between any of the above levels during the nine months ended September 30, 2014 and the year ended December 31, 2013 .
The Company’s derivative contracts include exchange-traded contracts fair valued utilizing readily available quoted market prices and non-exchange-traded contracts fair valued using market price quotations available through brokers or over-the-counter and on-line exchanges. In addition, in determining the fair value of the Company’s derivative contracts, the Company applies a credit risk valuation adjustment to reflect credit risk which is calculated based on the Company’s or the counterparty’s historical credit risks. As of September 30, 2014 and December 31, 2013 , the credit risk valuation adjustment was not material.
6. Accounting for Derivative Instruments
The Company is exposed to the impact of market fluctuations in the price of electricity and natural gas and basis costs, storage and ancillary capacity charges from independent system operators. The Company uses derivative instruments to manage exposure to these risks, and historically designated certain derivative instruments as cash flow hedges for accounting purposes. For derivatives designated in a qualifying cash flow hedging relationship, the effective portion of the change in fair value is recognized in accumulated other comprehensive income ("OCI") and reclassified to earnings in the period in which the hedged item affects earnings. Any ineffective portion of the derivative’s change in fair value is recognized currently in earnings.
The Company also holds certain derivative instruments that are not held for trading purposes but are also not designated as hedges for accounting purposes. These derivative instruments represent economic hedges that mitigate the Company’s exposure to fluctuations in commodity prices. For these derivative instruments, changes in the fair value are recognized currently in earnings in retail revenues or retail cost of revenues.
As part of the Company’s strategy to optimize its assets and manage related risks, it also manages a portfolio of commodity derivative instruments held for trading purposes. The Company’s commodity trading activities are

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Table of Contents

subject to limits within the Company’s Risk Management Policy. For these derivative instruments, changes in the fair value are recognized currently in earnings in net asset optimization revenues.
Derivative assets and liabilities are presented net in the Company’s condensed combined and consolidated balance sheets when the derivative instruments are executed with the same counterparty under a master netting arrangement. The Company’s derivative contracts include transactions that are executed both on an exchange and centrally cleared as well as over-the-counter, bilateral contracts that are transacted directly with a third party. To the extent the Company has paid or received collateral related to the derivative assets or liabilities, such amounts would be presented net against the related derivative asset or liability’s fair value. As of September 30, 2014 the Company had paid $0.1 million related to derivative liabilities fair value. As of December 31, 2013 , the Company had not paid or received any collateral amounts. The specific types of derivative instruments the Company may execute to manage the commodity price risk include the following:

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

• Forward electricity and natural gas purchase contracts for retail customer load, and
• Natural gas transportation contracts and storage agreements.  
Volumetric Underlying Derivative Transactions
The following table summarizes the net notional volume buy/(sell) of the Company’s open derivative financial instruments accounted for at fair value, broken out by commodity, as of:
Non-trading  
Commodity
Notional

September 30, 2014

December 31, 2013
Natural Gas
MMBtu

10,948


3,513

Natural Gas Basis
MMBtu

4,015


373

Electricity
MWh

602


465

Trading
Commodity
Notional

September 30, 2014

December 31, 2013
Natural Gas
MMBtu

562


2,259

Natural Gas Basis
MMBtu

—


1,443


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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,
  
2014

2013
Loss on non-trading derivatives—cash flow hedges, net
—


(892
)
Gain (loss) on non-trading derivatives, net (including loss on non-trading derivatives—affiliates, net of $0 and $66 for the three months ended September 30, 2014 and 2013, respectively)
(1,163
)

2,679

Gain (loss) on trading derivatives, net (including loss on trading derivatives—affiliates, net of $0 and $2,191 for the three months ended September 30, 2014 and 2013, respectively)
(15
)

895

Gain (loss) on derivatives, net
$
(1,178
)

$
2,682

Current period settlements on non-trading derivatives—cash flow hedges, net
—


1,180

Current period settlements on non-trading derivatives
3,039


(1,719
)
Current period settlements on trading derivatives (including current period settlements on trading derivatives—affiliates, net of $0 and $1,651 for the three months ended September 30, 2014 and 2013, respectively)
(35
)

(527
)
Total current period settlements on derivatives
$
3,004


$
(1,066
)

Nine Months Ended September 30,
  
2014

2013
Loss on non-trading derivatives—cash flow hedges, net (including ineffectiveness loss of $288 for the nine months ended September 30, 2013)
$
—


$
(1,096
)
Gain on non-trading derivatives, net (including gain on non-trading derivatives—affiliates, net of $10 for the nine months ended September 30, 2013)
5,847


695

Gain (loss) on trading derivatives, net (including gain (loss) on trading derivatives—affiliates, net of $1,792 and ($2,462) for the nine months ended September 30, 2014 and 2013, respectively)
(5,585
)

2,441

Gain on derivatives, net
$
262


$
2,040

Current period settlements on non-trading derivatives—cash flow hedges
$
—


$
—

Current period settlements on non-trading derivatives
(9,959
)

(1,843
)
Current period settlements on trading derivatives (including current period settlements on trading derivatives—affiliates, net of $1,693 and $2,191 for the nine months ended September 30, 2014 and 2013, respectively)
2,707


(33
)
Total current period settlements on derivatives
$
(7,252
)

$
(1,876
)
Gains (losses) on trading derivative instruments are recorded in net asset optimization revenues and gains (losses) on non-trading derivative instruments are recorded in retail revenues or retail cost of revenues on the condensed combined and consolidated statements of operations.


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Fair Value of Derivative Instruments
The following tables summarize the fair value and offsetting amounts of the Company’s derivative instruments by counterparty and collateral received or paid as of (in thousands):
 
  
September 30, 2014
Description
Gross Assets

Gross
Amounts
Offset

Net Assets

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
4,168


$
(3,461
)

$
707


$
—


$
707

Trading commodity derivatives
527


(334
)

193


—


193

Total Current Derivative Assets
4,695


(3,795
)

900


—


900

Non-trading commodity derivatives
123


(112
)

11


—


11

Total Non-current Derivative Assets
123


(112
)

11


—


11

Total Derivative Assets
$
4,818


$
(3,907
)

$
911


$
—


$
911



September 30, 2014
Description
Gross 
Liabilities

Gross
Amounts
Offset

Net
Liabilities

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
(5,102
)

$
3,461


$
(1,641
)

$
139


$
(1,502
)
Trading commodity derivatives
(433
)

334


(99
)

—


(99
)
Total Current Derivative Liabilities
(5,535
)

3,795


(1,740
)

139


(1,601
)
Non-trading commodity derivatives
(186
)

112


(74
)

—


(74
)
Total Non-current Derivative Liabilities
(186
)

112


(74
)

—


(74
)
Total Derivative Liabilities
$
(5,721
)

$
3,907


$
(1,814
)

$
139


$
(1,675
)
 
  
December 31, 2013
Description
Gross Assets

Gross
Amounts
Offset

Net Assets

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
11,564


$
(6,898
)

$
4,666


$
—


$
4,666

Trading commodity derivatives
3,949


(544
)

3,405


—


3,405

Total Current Derivative Assets
15,513


(7,442
)

8,071


—


8,071

Non-trading commodity derivatives
100


(94
)

6


—


6

Trading commodity derivatives
14


(14
)

—


—


—

Total Non-current Derivative Assets
114


(108
)

6


—


6

Total Derivative Assets
$
15,627


$
(7,550
)

$
8,077


$
—


$
8,077

 

18
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December 31, 2013
Description
Gross Liabilities

Gross
Amounts
Offset

Net
Liabilities

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
(8,289
)

$
6,898


$
(1,391
)

$
—


$
(1,391
)
Trading commodity derivatives
(986
)

544


(442
)

—


(442
)
Total Current Derivative Assets
(9,275
)

7,442


(1,833
)

—


(1,833
)
Non-trading commodity derivatives
(120
)

94


(26
)

—


(26
)
Trading commodity derivatives
(6
)

14


8


—


8

Total Non-current Derivative Assets
(126
)

108


(18
)

—


(18
)
Total Derivative Liabilities
$
(9,401
)

$
7,550


$
(1,851
)

$
—


$
(1,851
)

Accumulated Other Comprehensive Income
The following table summarizes the effects on the Company’s accumulated OCI balance attributable to cash flow hedge derivative instruments for the periods indicated (in thousands):  
  
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2014
 
2013
 
2014
 
2013
Accumulated OCI balance, beginning of period
$
—

 
$
—

 
$
—

 
$
(2,536
)
Deferred gain (loss) on cash flow hedge derivative instruments
—

 
—

 
—

 
2,620

Reclassification of accumulated OCI net to income
—

 
—

 
—

 
(84
)
Accumulated OCI balance, end of period
$
—

 
$
—

 
$
—

 
$
—

The amounts reclassified from accumulated OCI into income and any amounts recognized in income from the ineffective portion of cash flow hedges are recorded in retail cost of revenues. In June 2013, the Company elected to discontinue cash flow hedge accounting.
7. Equity

Class A Common Stock

The Company has a total of 3,000,000 shares of its Class A common stock outstanding at September 30, 2014. Each share of Class A common stock holds economic rights and entitles its holder to one vote on all matters to be voted on by shareholders generally.

Class B Common Stock

The Company has a total of 10,750,000 shares of its Class B common stock outstanding at September 30, 2014. Each share of Class B common stock, all of which is held by NuDevco, has no economic rights but entitles its holder to one vote on all matters to be voted on by shareholders generally.

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

Preferred Stock

The Company has 20,000,000 shares of authorized preferred stock for which there are no issued and outstanding shares at September 30, 2014.

19
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Earnings Per Share

Basic earnings per share ("EPS") is computed by dividing net income attributable to shareholders (the numerator) by the weighted-average number of Class A common shares outstanding for the period (the denominator). Class B common shares are not included in the calculation of basic earnings per share because they have no economic interest in the Company. Diluted earnings per share is similarly calculated except that the denominator is increased (1) using the treasury stock method to determine the potential dilutive effect of the Company's outstanding unvested restricted stock units and (2) using the if-converted method to determine the potential dilutive effect of the Company's Class B common stock. The Company's unvested restricted stock units were not recognized in dilutive earnings per share as they would have been antidilutive. The Class B common stock conversion to Class A common stock was not recognized in dilutive earnings per share for the nine months ended September 30, 2014 as the effect of the conversion would be antidilutive.

The following table presents the computation of earnings per share for the three and nine month period ended September 30, 2014 and 2013 (in thousands, except per share data):


For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2014

2014
Net income attributable to shareholders
$
1,061


$
1,061

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


3,000

Basic EPS attributable to shareholders
$
0.35


$
0.35

 



Net income attributable to shareholders
$
1,061


$
1,061

Effect of conversion of Class B common stock to shares of Class A common stock
(642
)

—

Diluted net income attributable to shareholders
419


1,061

Basic weighted average shares outstanding
3,000


3,000

Effect of dilutive Class B common stock (1)
10,750


—

Effect of dilutive restricted stock units
—


—

Diluted weighted average shares outstanding
13,750


3,000





Diluted EPS attributable to shareholders
$
0.03


$
0.35


(1) Based on outstanding shares for the period from the Offering date of August 1, 2014 to September 30, 2014.

Non-controlling Interest

As a result of the Offering, the Company acquired a 21.82% economic interest in Spark HoldCo, and is the sole managing member in Spark HoldCo, with NuDevco Retail Holdings, LLC and NuDevco Retail, LLC (collectively, "NuDevco") retaining a 78.18% economic interest in Spark HoldCo. As a result, the Company has consolidated the financial position and results of operations of Spark HoldCo and reflected the economic interest retained by NuDevco as a non-controlling interest. Net income attributable to non-controlling interest for each of the three and nine months ended September 30, 2014 represents the net income attributable to NuDevco prior to the Offering and NuDevco's retained interest subsequent to the Offering.

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8. Stock-Based Compensation

Restricted Stock Units

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

On August 1, 2014, the Company granted restricted stock units to our employees, non-employee directors and certain employees of our affiliates who perform services for the Company. The restricted stock unit awards vest over a nine month period for non-employee directors and ratably over approximately three or four years for officers, employees, and employees of affiliates, depending on years of service at the grant date, with the initial vesting date occurring on May 4, 2015 and each subsequent vesting date occurring each May 4 thereafter. Each restricted stock unit is entitled to receive a dividend equivalent when dividends are declared and distributed to shareholders of Class A common stock. These dividend equivalents shall be retained by the Company, reinvested in additional restricted stock units effective as of the record date of such dividends and vested upon the same schedule as the underlying restricted stock unit. No dividend equivalents have been issued as of September 30, 2014 as the Company had not declared any dividends as of such date. In accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”) , the Company measures the cost of awards classified as equity awards based on the grant date fair value of the award and the Company measures the cost of awards classified as liability awards at the fair value of the award at each reporting period. The Company has utilized an estimated 6% annual forfeiture rate of restricted stock units in determining the fair value for all awards excluding those issued to executive level recipients and non-employee directors, for which no forfeitures are estimated to occur. The Company has elected to recognize related compensation expense on a straight-line basis over the associated vesting periods. Although the restricted stock units allow for cash settlement of the awards at the sole discretion of management of the Company, management intends to settle the awards by issuing shares of the Company’s Class A common stock.

Equity Classified Restricted Stock Units

Restricted stock units issued to employees and officers of the Company are classified as equity awards. The fair value of the equity classified restricted stock units was based on the Company’s Class A common stock price as of the grant date, and the Company recognized stock based compensation expense of $0.2 million for the three and nine months ended September 30, 2014 in general and administrative expense and a corresponding increase to additional paid in capital. No compensation expense was recorded for the same periods in 2013 as there were no LTIP awards outstanding.

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The following table summarizes equity classified restricted stock unit activity and unvested restricted stock units for the nine months ended September 30, 2014:

Number of Shares
Weighted Average Grant Date Fair Value
Unvested at December 31, 2013
—
—
Granted
264,150
$18.00
Vested
—
—
Forfeited
(5,850)
18.00
Unvested at September 30, 2014
258,300
$18.00

As of September 30, 2014, there was $4.2 million of total unrecognized compensation cost related to the Company's equity classified restricted stock units, which is expected to be recognized over a weighted average period of approximately 3.8 years.

Liability Classified Restricted Stock Units

Restricted stock units issued to non-employee directors of the Company and employees of certain of our affiliates are classified as liability awards in accordance with ASC 718 as the awards are either to a) non-employee directors that allow for the recipient to choose net settlement for the amount of withholding taxes dues upon vesting or b) to employees of certain affiliates of the Company and are therefore not deemed to be employees of the Company. The fair value of the liability classified restricted stock units was based on the Company’s Class A common stock price as of the reported period ending date and the Company recognized stock based compensation expense of $0.2 million for the three and nine months ended September 30, 2014 in general and administrative expense and a corresponding increase to liabilities. As of September 30, 2014, the Company's liabilities related to these restricted stock units were recorded in other current liabilities and other non-current liabilities of $0.1 million and $0.1 million , respectively. No compensation expense was recorded for the same periods in 2013 as there were no LTIP awards outstanding.

The following table summarizes liability classified restricted stock unit activity and unvested restricted stock units for the nine months ended September 30, 2014:

Number of Shares
Weighted Average Reporting Date Fair Value
Unvested at December 31, 2013
—
—
Granted
122,000
$17.37
Vested
—
—
Forfeited
—
—
Unvested at September 30, 2014
122,000
$17.37

As of September 30, 2014, there was $1.9 million of total unrecognized compensation cost related to the Company's liability classified restricted stock units, which is expected to be recognized over a weighted average period of approximately 2.9 years.

9. Taxes

Income Taxes

The Company accounts for income taxes using the assets and liabilities method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and those assets and liabilities tax bases. The Company applies existing

22
Table of Contents

tax law and the tax rate that the Company expects to apply to taxable income in the years in which those differences are expected to be recovered or settled in calculating the deferred tax assets and liabilities. Effects of changes in tax rates on deferred tax assets and liabilities are recognized in income in the period of the tax rate enactment.

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

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

On the Offering date, the Company recorded a net deferred tax asset of approximately $15.6 million related to the step up in tax basis resulting from the purchase by the Company of Spark HoldCo units from NuDevco. In addition, the Company recorded a long-term liability of $20.9 million to record the effect of the Tax Receivable Agreement liability (See Note 11 "Transactions with Affiliates" for further discussion) and a corresponding long-term deferred tax asset of approximately $8.0 million . The payable pursuant to the Tax Receivable Agreement and the deferred tax assets were recorded with a corresponding offsetting debit or credit to additional paid-in capital.

The effective U.S. federal and state income tax rate for the nine months ended September 30, 2014 is 37.4% with respect to pre-tax income attributable to the Company's stockholders. Total income tax expense for the three and nine months ended September 30, 2014 differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income due primarily to state taxes and the impact of permanent differences between book and taxable income, most notably the income attributable to noncontrolling interest.
10. Commitments and Contingencies
From time to time, the Company may be involved in legal, tax, regulatory and other proceedings in the ordinary course of business. Management does not believe that we are a party to any litigation, claims or proceedings that will have a material impact on the Company’s condensed combined and consolidated financial condition or results of operations.

23
Table of Contents

11. Transactions with Affiliates
The Company enters into transactions with and pays certain costs on behalf of affiliates that are commonly controlled in order to reduce risk, reduce administrative expense, create economies of scale, create strategic alliances and supply goods and services to these related parties. The Company also sells and purchases natural gas and electricity with affiliates. The Company presents receivables and payables with the same affiliate on a net basis in the condensed combined and consolidated balance sheets as all affiliate activity is with parties under common control.
Accounts Receivable and Payable-Affiliates
The Company recorded current accounts receivable-affiliates of $0.5 million and $6.8 million as of September 30, 2014 and December 31, 2013 , respectively, and current accounts payable-affiliates of $0.9 million and $0 million as of September 30, 2014 and December 31, 2013, respectively for certain direct billings and cost allocations for services the Company provided to affiliates and sales or purchases of natural gas and electricity with affiliates.

24
Table of Contents

Revenues and Cost of Revenues-Affiliates
Prior to Marlin’s initial public offering on July 31, 2013, the Company provided natural gas to Marlin, who is a processing service provider, whereby Marlin gathered natural gas from the Company and other third parties, extracted NGLs, and redelivered the processed natural gas to the Company and other third parties. Marlin replaced energy used in processing due to the extraction of liquids, compression and transportation of natural gas, and fuel by making a payment to the Company at market prices. Revenues-affiliates, recorded in net asset optimization revenues in the condensed combined and consolidated statements of operations, related to Marlin’s payments to the Company for replaced energy for the three and nine months ended September 30, 2013 was $0.2 million and $ 3.0 million , respectively.
Beginning on August 1, 2013, the Marlin processing agreement was terminated and the Company and another affiliate entered into an agreement whereby the Company purchased natural gas from the affiliate at the tailgate of the Marlin plant. Cost of revenues-affiliates, recorded in net asset optimization revenues in the condensed combined and consolidated statements of operations for the three and nine months ended September 30, 2014 related to this agreement were $6.5 million and $25.0 million , respectively. The cost of revenues-affiliates recorded in net asset optimization revenues in the condensed combined and consolidated statements of operations for the three and nine months ended September 30, 2013 related to this agreement were $5.5 million and $5.5 million , respectively. The Company also purchased natural gas at a nearby third party plant inlet which was then sold to the affiliate. Revenues-affiliates, recorded in net asset optimization revenues in the condensed combined and consolidated statements of operations for the three and nine months ended September 30, 2014 related to these sales were $3.2 million and $10.3 million , respectively.  Revenues-affiliates recorded in net asset optimization revenues for the three and nine months ended September 30, 2013 related to these sales were $4.9 million and $4.9 million , respectively.
Additionally, the Company entered into a natural gas transportation agreement with Marlin, at Marlin’s pipeline, whereby the Company transports retail natural gas and pays the higher of (i) a minimum monthly payment or (ii) a transportation fee per MMBtu times actual volumes transported. The current transportation agreement was set to expire on February 28, 2013, but was extended for three additional years at a fixed rate per MMBtu without a minimum monthly payment. Included in the Company’s results are cost of revenues-affiliates, recorded in retail cost of revenues in the condensed combined and consolidated statements of operations related to this activity, which was $0 million and less than $0.1 million for the three months ended September 30, 2014 and 2013 , respectively and less than $0.1 million for both the nine months ended for September 30, 2014 and 2013 .
Prior to the Offering, the Company also purchased electricity for an affiliate and sold the electricity to the affiliate at the same market price that the Company paid to purchase the electricity. Sales of electricity to the affiliate were $0 million and $2.5 million for the three months ended September 30, 2014 and 2013, respectively, and $2.2 million and $3.0 million for the nine months ended September 30, 2014 and 2013, respectively, which is recorded in retail revenues-affiliate in the condensed combined and consolidated statements of operations.
Also included in the Company’s results are cost of revenues-affiliates related to derivative instruments, recorded in net asset optimization revenues in the condensed combined and consolidated statements of operations, which is $0 million and a gain of $2.2 million for the three months ended September 30, 2014 and 2013, respectively, and a loss of $0.6 million and a gain of $2.7 million for the nine months ended September 30, 2014 and 2013, respectively.
Cost allocations
The Company paid certain expenses on behalf of affiliates, which are reimbursed by the affiliates to the Company, including costs that can be specifically identified and certain allocated overhead costs associated with general and administrative services, including executive management, facilities, banking arrangements, professional fees, insurance, information services, human resources and other support departments to the affiliates. Where costs incurred on behalf of the affiliate could not be determined by specific identification for direct billing, the costs were primarily allocated to the affiliated entities based on percentage of departmental usage, wages or headcount. The total amount direct billed and allocated to affiliates was $0.8 million and $1.8 million for the three months ended

25
Table of Contents

September 30, 2014 and 2013, respectively, and $4.1 million and $5.3 million for the nine months ended September 30, 2014 and 2013, respectively, which is recorded as a reduction in general and administrative expenses in the condensed combined and consolidated statements of operations.
The Company pays residual commissions to an affiliate for all customers enrolled by the affiliate who pay their monthly retail gas or retail electricity bill. Commissions paid to the affiliate was $0 million and less than $0.1 million for the three months ended September 30, 2014 and 2013, respectively and $0.1 million for both the nine months ended September 30, 2014 and 2013, which is recorded in general and administrative expense in the condensed combined and consolidated statements of operations. This agreement with the affiliate was terminated in May 2014.
Member Distributions and Contributions
During the nine months ended September 30, 2014 and 2013 , the Company made net capital distributions to W. Keith Maxwell III of $36.4 million and $38.1 million , respectively. In contemplation of the Company’s initial public offering, the Company entered into an agreement with an affiliate in April 2014 to permanently forgive all net outstanding accounts receivable balances from the affiliate through the Offering date. As such, the accounts receivable balances from the affiliate have been eliminated and presented as a distribution to W. Keith Maxwell III for 2014 and 2013 .

Tax Receivable Agreement

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

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

During the five -year period commencing October 1, 2014, the Company will defer all or a portion of any TRA Payment owed pursuant to the Tax Receivable Agreement to the extent that Spark HoldCo does not generate sufficient Cash Available for Distribution (as defined below) during the four-quarter period ending September 30th of the applicable year in which the TRA Payment is to be made in an amount that equals or exceeds 130% (the “TRA Coverage Ratio”) of the Total Distributions (as defined below) paid in such four-quarter period by Spark HoldCo. For purposes of computing the TRA Coverage Ratio:
 
•
"Cash Available for Distribution" is generally defined as the Adjusted EBITDA of Spark HoldCo for the applicable period, less (i) cash interest paid by Spark HoldCo, (ii) capital expenditures of Spark HoldCo (exclusive of customer acquisition costs) and (iii) any taxes payable by Spark HoldCo; and
•
"Total Distributions" are defined as the aggregate distributions necessary to cause the Company to receive distributions of cash equal to (i) the targeted quarterly distribution the Company intends to pay to holders of its Class A common stock payable during the applicable four-quarter period, plus (ii) the estimated taxes payable by the Company during such four-quarter period, plus (iii) the expected TRA Payment payable during the calendar year for which the TRA Coverage Ratio is being tested.

26
Table of Contents


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

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

12. Segment Reporting
The Company’s determination of reportable business segments considers the strategic operating units under which the Company makes financial decisions, allocates resources and assesses performance of its retail and asset optimization businesses.
The Company’s reportable business segments are retail natural gas and retail electricity. The retail natural gas segment consists of natural gas sales to, and natural gas transportation and distribution for, residential and commercial customers. Asset optimization activities, considered an integral part of securing the lowest price natural gas to serve retail gas load, are part of the retail natural gas segment. The Company recorded asset optimization revenues of $45.9 million and $225.4 million and asset optimization cost of revenues of $46.0 million and $223.7 million for the three and nine months ended September 30, 2014 , respectively, and recorded asset optimization revenues of $54.2 million and $214.7 million and asset optimization cost of revenues of $54.2 million and $217.6 million for the three and nine months ended September 30, 2013 , respectively, which are presented on a net basis in asset optimization revenues. The retail electricity segment consists of electricity sales and transmission to residential and commercial customers. Corporate and other consists of expenses and assets of the retail natural gas and retail electricity segments that are managed at a consolidated level such as general and administrative expenses.
To assess the performance of the Company’s operating segments, the chief operating decision maker analyzes retail gross margin. The Company defines retail gross margin as operating income plus (i) depreciation and amortization expenses and (ii) general and administrative expenses, less (i) net asset optimization revenues, (ii) net gains (losses) on derivative instruments, and (iii) net current period cash settlements on derivative instruments. The Company deducts net gains (losses) on derivative instruments, excluding current period cash settlements, from the retail gross margin calculation in order to remove the non-cash impact of net gains and losses on derivative instruments.
Retail gross margin is a primary performance measure used by our management to determine the performance of our retail natural gas and electricity business by removing the impacts of our asset optimization activities and net non-cash income (loss) impact of our economic hedging activities. As an indicator of our retail energy business’ operating performance, retail gross margin should not be considered an alternative to, or more meaningful than, operating income, as determined in accordance with GAAP. Below is a reconciliation of retail gross margin to income before income tax expense.  

27
Table of Contents

  
Three Months Ended September 30,

Nine Months Ended September 30,
  
2014

2013

2014

2013
Reconciliation of Retail Gross Margin to Income before taxes







Income before income tax expense
$
1,032


$
(1,583
)

$
7,906


$
12,110

Interest and other income
(40
)

(124
)

(111
)

(135
)
Interest expense
615


597


1,150


1,267

Operating Income
1,607


(1,110
)

8,945


13,242

Depreciation and amortization
4,113


3,390


10,324


12,704

General and administrative
10,634


7,577


28,494


26,289

Less:







Net asset optimization revenue
(141
)

17


1,681


(2,922
)
Net, Gains (losses) on derivative instruments
(1,163
)

1,787


5,847


(401
)
Net, Cash settlements on derivative instruments
3,039


(539
)

(9,959
)

(1,843
)
Retail Gross Margin
$
14,619


$
8,592


$
50,194


$
57,401


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

Financial data for business segments are as follows (in thousands):  
Three Months Ended September 30, 2014
Retail
Electricity
 
Retail
Natural Gas
 
Corporate
and Other
 
Eliminations
 
Total Spark Retail
Total Revenues
$
51,748

 
$
16,469

 
$
—

 
$
—

 
$
68,217

Retail cost of revenues
41,628

 
10,235

 
—

 
—

 
51,863

Less:
 
 
 
 
 
 
 
 
 
Net asset optimization revenues
—

 
(141
)
 
—

 
—

 
(141
)
Gains (losses) on retail derivative instruments
445

 
(1,608
)
 
—

 
—

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

 
133

 
—

 
—

 
3,039

Retail gross margin
$
6,769

 
$
7,850

 
$
—

 
$
—

 
$
14,619

Total Assets
$
47,677

 
$
92,974

 
$
20,309

 
$
(38,886
)
 
$
122,074

 
Three Months Ended September 30, 2013
Retail
Electricity

Retail
Natural Gas

Corporate
and Other

Eliminations

Total Spark Retail
Total revenues
$
57,014


$
12,885


$
—


$
—


$
69,899

Retail cost of revenues
52,165


7,877


—


—


60,042

Less:









Net asset optimization revenues
—


17


—


—


17

Gains (losses) on retail derivative instruments
(444
)

2,231


—


—


1,787

Current period settlements on non-trading derivatives
896


(1,435
)

—


—


(539
)
Retail gross margin
$
4,397


$
4,195


$
—


$
—


$
8,592

Total Assets
$
41,174


$
81,401


$
548


$
(34,629
)

$
88,494


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Nine Months Ended September 30, 2014
Retail
Electricity

Retail
Natural Gas

Corporate
and Other

Eliminations

Total Spark Retail
Total Revenues
$
137,968


$
102,166


$
—


$
—


$
240,134

Retail cost of revenues
114,997


77,374


—


—


192,371

Less:









Net asset optimization revenues
—


1,681


—


—


1,681

Gains (losses) on retail derivative instruments
6,037


(190
)

—


—


5,847

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

(2,374
)

—


—


(9,959
)
Retail gross margin
$
24,519


$
25,675


$
—


$
—


$
50,194

Total Assets
$
47,677


$
92,974


$
20,309


$
(38,886
)

$
122,074

Nine Months Ended September 30, 2013
Retail
Electricity

Retail
Natural Gas

Corporate
and Other

Eliminations

Total Spark Retail
Total Revenues
$
151,366


$
83,310


$
—


$
—


$
234,676

Retail cost of revenues
124,138


58,303


—


—


182,441

Less:









Net asset optimization revenues