9. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. This includes not only the credit standing of counterparties involved and the impact of credit enhancements but also the impact of the Company’s own nonperformance risk on its liabilities.

The Company applies fair value measurements to its commodity derivative instruments and a contingent payment arrangement based on the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:


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

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


•	Level 3—Unobservable inputs for the asset or liability, including situations where there is little, if any, observable market activity for the asset or liability. The Level 3 category includes estimated earnout obligations related to the Company's acquisitions.

As the fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3), the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. In these cases, the lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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



	Level 1			Level 2			Level 3			Total
March 31, 2017
Non-trading commodity derivative assets	$	865		$	1,515		$	—		$	2,380
Trading commodity derivative assets	—			8			—			8
Total commodity derivative assets	$	865		$	1,523		$	—		$	2,388
Non-trading commodity derivative liabilities	$	(238	)	$	(6,305	)	$	—		$	(6,543	)
Trading commodity derivative liabilities	(124		)	(20		)	—			(144		)
Total commodity derivative liabilities	$	(362	)	$	(6,325	)	$	—		$	(6,687	)
Contingent payment arrangement	$	—		$	—		$	(16,186	)	$	(16,186	)



	Level 1		Level 2			Level 3			Total
December 31, 2016
Non-trading commodity derivative assets	$	1,511	$	9,385		$	—		$	10,896
Trading commodity derivative assets	101		430			—			531
Total commodity derivative assets	$	1,612	$	9,815		$	—		$	11,427
Non-trading commodity derivative liabilities	$	—	$	(661	)	$	—		$	(661	)
Trading commodity derivative liabilities	—		(87		)	—			(87		)
Total commodity derivative liabilities	$	—	$	(748	)	$	—		$	(748	)
Contingent payment arrangement	$	—	$	—		$	(22,653	)	$	(22,653	)

The Company had no transfers of assets or liabilities between any of the above levels during the three months ended March 31, 2017 and the year ended December 31, 2016.

The Company’s derivative contracts include exchange-traded contracts fair valued utilizing readily available quoted market prices and non-exchange-traded contracts fair valued using market price quotations available through brokers or over-the-counter and on-line exchanges. In addition, in determining the fair value of the Company’s derivative contracts, the Company applies a credit risk valuation adjustment to reflect credit risk which is calculated based on the Company’s or the counterparty’s historical credit risks. As of March 31, 2017 and December 31, 2016, the credit risk valuation adjustment was not material.

The contingent payment arrangements referred to above reflect estimated earnout obligations incurred in relation to the Company's acquisitions. As of March 31, 2017, the estimated earnout obligations were $16.2 million, which was comprised of the Provider Earnout, the Major Earnout and the Stock Earnout in the amount of $4.0 million, $11.4 million, and $0.8 million, respectively. As of December 31, 2016, the estimated earnout obligations were $22.7 million, which was comprised of the Provider Earnout, the Major Earnout and the Stock Earnout in the amount of $4.9 million, $17.1 million, and $0.7 million, respectively. As of March 31, 2017, the estimated earnouts are recorded on our condensed consolidated balance sheets in current liabilities - contingent consideration and long-term liabilities - contingent consideration in the amount of $12.1 million and $4.1 million, respectively; and as of December 31, 2016, in current liabilities - contingent consideration and long-term liabilities - contingent consideration in the amount of $11.8 million and $10.8 million, respectively.

The Provider Earnout is based on achievement by the Provider Companies of a certain customer count criteria over the nine month period following the closing of the Provider Companies acquisition. The sellers of the Provider Companies are entitled to a maximum of $9.0 million and a minimum of $5.0 million in earnout payments based on the level of customer count attained, as defined by the Provider Companies membership interest purchase agreement. In March 2017, the Company paid the sellers of the Provider Companies $1.0 million related to the earnout based on the achievement of certain customer count targets. During the three months ended March 31, 2017, the Company recorded accretion of $0.1 million to reflect the impact of the time value of the liability. The Company has revalued the liability at March 31, 2017 with no expected change of the earnout payments. In determining the fair value of the Provider Earnout, the Company forecasted an expected customer count and certain other related criteria and calculated the probability of such forecast being attained. As this calculation is based on management's estimates of the liability, we classified the Provider Earnout as a Level 3 measurement.

The Major Earnout is based on the achievement by the Major Energy Companies of certain performance targets over the 33 month period following NG&E's closing of the Major Energy Companies acquisition (i.e., April 15, 2016). The previous members of Major Energy Companies are entitled to a maximum of $20.0 million in earnout payments based on the level of performance targets attained, as defined by the Major Purchase Agreement. The Stock Earnout obligation is contingent upon the Major Energy Companies achieving the Major Earnout's performance target ceiling, thereby earning the maximum Major Earnout payments. If the Major Energy Companies earn such maximum Major Earnout payments, NG&E would be entitled to a maximum of 200,000 shares of Class B common stock (and a corresponding number of Spark HoldCo units). Based on the financial results of the Major Energy Companies during the first earnout period, NG&E was not entitled to receive an issuance of shares of Class B common stock (and a corresponding number of SparkHoldCo units). In determining the fair value of the Major Earnout and the Stock Earnout, the Company forecasted certain expected performance targets and calculated the probability of such forecast being attained. In March 2017, the Company paid the previous members of the Major Energy Companies $7.4 million related to the achievement of targets for the period from April 15, 2016 through December 31, 2016. During the three month period ended March 31, 2017, the Company recorded accretion of $1.2 million to reflect the impact of the time value of the liability. The Company revalued the liability at March 31, 2017, resulting in the increase of the fair value of the liability to $12.2 million. The impact of the $0.7 million increase in fair value is recorded in general and administrative expenses. As this calculation is based on management's estimates of the liability, we classified the Major Earnout as a Level 3 measurement.

The following tables present reconciliations of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended March 31, 2017 and December 31, 2016.



	Major Earnout and Stock Earnout			Provider Earnout			Total
Fair value at December 31, 2016	$	17,760		$	4,893		$	22,653
Purchase price contingent consideration	$	—		$	—		$	—
Change in fair value of contingent consideration, net	711			—			711
Accretion of contingent earnout consideration (included within interest expense)	1,167			58			1,225
Settlements ⁽¹⁾	(7,403		)	(1,000		)	(8,403		)
Fair Value at March 31, 2017	$	12,235		$	3,951		$	16,186

(1) Settlements include pay downs at maturity

Other Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable, accounts receivable—affiliates, accounts payable, accounts payable—affiliates, and accrued liabilities recorded in the condensed consolidated balance sheets approximate fair value due to the short-term nature of these items. The carrying amount of the Senior Credit Facility recorded in the condensed consolidated balance sheets approximates fair value because of the variable rate nature of the Company’s line of credit. The fair value of our convertible subordinated notes to affiliates is not determinable for accounting purposes due to the affiliate nature and terms of the associated debt instrument with the affiliate. The fair value of the payable pursuant to tax receivable agreement—affiliate is not determinable for accounting purposes due to the affiliate nature and terms of the associated agreement with the affiliate.