SPKE Burkenroads Report

SPARK ENERGY INC. SPKE/NASDAQ

Initiating Coverage: Sparky Says Stop, Drop, and Buy

Investment Rating: Market Outperform

Ownership structure is complex but provides for operational and

economic flexibility

Regulatory changes impact operations and growth

Necessity goods withstand rocky economic conditions

Our 12‐month target price is $21.

Company Quick View:

It just takes a spark to light a fire under the stodgy old utility industry. Spark Energy is a competitive utility provider of commercial and residential energy. Spark operates in the deregulated utilities market, in which utility companies are solely responsible for operations maintenance and distribution of third‐party generated energy to the consumer. Load‐Serving Entities like Spark purchase already‐generated energy and sell the energy, distributing it through pre‐existing channels. Spark is comprised of two primary business segments: Spark Energy Gas, LLC. and Spark Energy, LLC. (electricity). The Company is located in Houston, Texas and serves customers in 16 states.

Company Website: www.sparkenergy.com

Analysts: Investment Research Manager:

Jordan Boretz Evan Koehler

Benjamin Ginsburg

Samantha Becker

Drew Hochhauser

November 17, 2015

PRICE: $ 17.68 S&P 500: 2,050.44 DJIA: 17,489.50 RUSSELL 2000: 1,153.21

Valuation

EPS*P/ECFPS

P/CFPS* Excluding non‐recurring ite

2014 A$ (0.02)

NM$ 15.52

1.1x ems

2015 E$ 1.909.3x

$ 3.565.0x

2016 E$ 3.505.1x

$ 4.703.8x

Market Capitalization Stock DataEquity Market Cap (MM): $244.87 52‐Week Range: $11.85 ‐ $17.84

Enterprise Value (MM): $291.92 12‐Month Stock Performance: 10.51%

Shares Outstanding (MM): 13.85 Dividend Yield: 7.48%

Estimated Float (MM): 2.99 Book Value Per Share: $ 0.866‐Mo. Avg. Daily Volume: 30,943 Beta: N/A

The BURKENROAD REPORTS are produced solely as a part of an educational program of Tulane University's Freeman School of Business. The reports are not investment advice and you should not and may not rely on them in making any investment decision. You should consult an investment professional and/or conduct your own primary research regarding any potential investment.

Wall Street's Farm Team

BURK

ENRO

AD R

EPO

RTS

4/1/13 4:47 PM

Spark Energy Inc. (SPKE) BURKENROAD REPORTS (www.burkenroad.org) November 17, 2015

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Figure 1: 5‐Year Stock Performance

Source: Yahoo! Finance November 17, 2015

INVESTMENT SUMMARY

Our analyst team gives Spark Energy a rating of Market Outperform with a 12‐month target price of $21 per share. Our team used the discounted cash flow valuation method with a weighted average cost of capital.

Spark Energy, Inc. is a Houston‐based retail utility services company that supplies customers with electricity and natural gas. The Company operates in the competitive, deregulated utilities market. Within this market, many utility providers compete for the same customers. Customers are free to choose their energy provider and have the ability to change providers. Despite competing in a market susceptible to regulatory change, Spark has the competitive advantage of a unique ownership structure that provides for operational and economic flexibility. We forecast that this unique ownership structure will aid Spark in future customer and company acquisitions. Spark continues to maintain a low customer attrition rate by providing excellent customer service and follow‐up mechanisms. Following trends of the previous 24 months, we believe that these acquisitions, combined with organic growth and a low attrition rate, will fuel steady growth in the Company.

Although downturns in the economy significantly affect many companies, Spark is able to provide a necessity good as well as hedge energy prices so it does not absorb the cost volatility of the energy for fixed price contracts. Additionally, Spark is able to pass on the volatility of energy prices to variable price contract customers. Our team forecasts Spark Energy will outperform the market and we anticipate sustained revenue growth.


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INVESTMENT THESIS

Our analyst team gives Spark Energy a Market Outperform rating and projects Spark Energy’s stock price will increase from $16.38 as of October 23, 2015 to a 12‐month target price of $21.

Ownership structure is complex but provides for operational and economic flexibility

Spark has a distinct competitive advantage in acquisition opportunities that arise out of the Company’s unique structure. Keith Maxwell, the founder of Spark Energy, holds a majority of Spark’s voting rights and is the sole owner of Nudevco Retail Holdings LLC. In this arrangement, Nudevco holds these acquired companies for Spark Energy. Spark’s management may acquire the company piece by piece or as a whole. This flexibility effectively delivers management a prolonged due diligence period and an opportunity to integrate the acquired asset(s) or companies at an appropriate rate.

Regulatory changes impact operations and growth

The deregulated markets where Spark competes are inherently susceptible to regulatory change. Market participants act similar to investors exposing and pursuing arbitrage opportunities. Retail energy providers rush to opportunities in the market that allow for increased margins by raising consumer prices or lowering costs. If the opportunity is particularly advantageous to the providers at the expense of the consumer, regulators will pass legislation to end this opportunity.

A number of factors limit Spark’s direct risks associated with regulation. The prolonged legal process grants the market the privilege of foresight. Spark and its peers are able to anticipate and plan for changes long before regulators enact change. Similarly, any legislation passed affects all market participants. Spark’s nible organizational depth allows it to react quickly to approved legislation. If regulation negatively affects Spark’s cost structure, Spark will pass these costs to the customer.

Necessity goods withstand rocky economic conditions

Spark Energy is a provider of necessity goods, goods that people must have to sustain basic living conditions. Therefore, customers will not drop Spark Energy as a power provider in a volatile economy unless Spark cannot offer competitive prices. Customers may look to consume less power through conservatory steps, however, electricity and natural gas usage decreases are generally minimal. As almost all utility providers do, when electricity and natural gas costs increase, Spark could pass the increases to its variable rate customers. Spark hedges the energy prices of its fixed‐rate contracts so that it does not need to absorb the cost volatility of the energy consumed by those fixed rate customers. Thus, Spark Energy will likely outperform the market in rocky economic times, as it offers a necessity product and it is able to manage increased costs.


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After researching and testing different valuation methods for retail energy companies, we decided to use a combination of dividend discount model (DDM) and price to cash flow model (P/CF). We weighted the two methods equally to arrive at Spark Energy’s 12‐month target price of $21. Our first step involved forecasting the Company’s financial statements using sensitivity analysis and testing different scenarios with the discounted cash flows (DCF) valuation method. This step provided us with insight into the drivers of Spark’s cash flows, expenses, and profits. The team felt that the DCF method was not applicable to Spark because our Company recently went public and has not published enough historical information for the DCF to be accurate. As a result, our team focused on the dividend discount model, considering Spark Energy’s commitment to paying out stable dividends as it increases its cash flows.

Dividend Discount Model

The dividend discount model (DDM) is a common utility industry valuation method because of the sector’s common quarterly dividend payout. The DDM values a stock as the sum of the present value of all future dividends. The current stock price is calculated by dividing next year's dividend by the after tax weighted average cost of capital (WACC) minus the terminal dividend growth rate. We forecasted next year’s annual dividend to be $1.45 per share. Management was adamant that Spark is committed to maintaining an $1.45 annual dividend. Our team assumed an after‐tax WACC rate of 11% and terminal dividend growth rate of 4%. Using these different rates, our team arrived at a 12‐month target price of $20.71 per share.

Price to Cash Flow

We also considered price to cash flow (P/CF) as a valuation approach because it takes into consideration Spark’s commitment to growing operating cash flow through customer base growth. We calculate Spark’s P/CF per share by dividing Spark’s November 3, 2015 share price of $17.31 by forecasted expected forward earnings of $3.39. The quotient was then multiplied by Spark’s annual operating cash flow per share of $4.09. The P/CF method values Spark’s 12‐month target price at $20.88 per share.

INDUSTRY ANALYSIS

Spark Energy Inc. operates within the deregulated utilities industry as a competitive retail provider of commercial and residential energy. The U.S.’ utility industry as a whole is composed of two types of markets: regulated and deregulated. Regulated markets, which exist in the majority of U.S. states, are comprised of companies that are responsible for the flow of energy from generation to distribution. State or local governments regulate these companies heavily, which must serve a specific region or group of customers. Since the passing of the Energy Policy Act of 1992, U.S. states have adopted deregulation policies. Deregulated markets are markets in which customers are able to choose one of many competing energy providers. Utility providers are only responsible for the distribution and billing of customers in these deregulated markets. Thus, regulated and competitive utility providers exist to supply customers in both markets.


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Industry Specifics

The utilities industry of the U.S. largely fragmented and only a few large companies account for the majority of the industry’s market capitalization. Figure 2 divides the electric utilities market into its largest members by weight. The electric utilities market alone had a market capitalization of $323.5 billion as of June 30, 2015. In comparison to the sector as a whole, Spark Energy’s market cap is relatively small at $236.7 million. Conversely, Spark’s significantly larger competitor, NRG Energy Inc., has a market cap of $5.1 billion. Duke Energy, the largest electricity utility provider in the U.S., has a market capitalization of $51.04 billion.

Figure 2: Electric Utility Sector Market Cap by Weight

Source: S&P Capital IQ

In addressing utility market trends, both regulated and deregulated markets are seasonal in nature. The first and last quarters of the calendar year generate the highest revenues because of heavier energy use, which correlates to weather trends. To grow its customer base, Spark and other utility providers mostly rely on door‐to‐door marketing. With customer loyalty almost non‐existent in the utilities market, providers seek to retain customers by providing excellent customer service while maintaining competitive pricing.

Geographic Area

Spark Energy operates in 16 states across 66 service territories with operations in the Northeast, Midwest, and Southwest regions of the U.S. Weather patterns across these regions drive the seasonality of Spark’s revenue stream. Other regional factors, such as specific state regulations, affect Spark’s ability to enter new markets and serve new customers. Figure 3 shows a map of the U.S. illustrating deregulation of electricity and natural gas by state. Spark looks to possibly enter these markets and expand through both organic entry and customer acquisitions. A macroeconomic factor that significantly affects utility markets is market competition. Competition drives the prices in deregulated markets, with each company striving to outprice its competitors.


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Figure 3: U.S. Electricity and Natural Gas Deregulation

Source: Spark Energy, DNV GL, EIA

Customers

As a utility company, Spark serves a wide variety of customers. The Company’s 357,000 residential customers represent a majority of its customer base. While Spark also serves commercial customers, the Company’s customers are primarily residential. Spark measures its number of customers in residential customer equivalents (RCEs). An RCE is a natural gas customer that uses 1000 MMBtu’s per year or an electricity customer that uses 10 MWh per year. The Company serves approximately 401,000 RCEs total.

Rather than demographic makeup, Spark Energy’s various pricing plans offer significant insight into the Company’s customer structure. Spark offers a variety of fixed and variable rate plans for both natural gas and electricity products. Fixed and variable rate contracts range from six to 24 months in duration. Of Spark’s natural gas customers, 55% have variable rate contracts while the other 45% have fixed rate contracts. Of Spark’s electricity customers, 49% have variable rate contracts and the other 51% have fixed rate contracts.

The industry has recently capitalized on providing green energy options that caters to environmentally conscious customers. Customers can choose to purchase Spark’s green energy. The green energy segment provides higher operating margins, increased customer satisfaction, and lower attrition rates than the other business segments. Management’s ongoing strategy for customer growth focuses on delivering competitive pricing, price certainty, and green products.

Natural Gas Electricity Both Neither


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Regulatory Environment

Federal, state, and local governments significantly regulate the utilities industry. Foremost, states individually choose to deregulate or regulate utilities markets. State utility deregulation is the baseline necessity for Spark to operate in a new state or market. The Federal Trade Commission (FTC) and state utility commissions regulate Spark Energy’s marketing campaigns, customer solicitations, and customer enrollments as well. As an energy provider, Spark participates in the energy wholesale market and hedges risk with futures contracts. The Commodity Future Trading Commission (CFTC) regulates these hedging activities. At a federal level, the Federal Energy Regulatory Commission (FERC) regulates the transport and resale of natural gas across states. Much of Spark’s regulation falls under individual state laws.

Competitors

Consumer demand within this industry correlates with economic activity and population growth. Success in the industry is largely contingent on developments with regulation and pricing of energy sources. Because of the ease of entry in established markets, Spark competes with hundreds of providers. Spark mainly competes with AEP Energy, Champion Energy Services, LLC, ConEdison Solutions, Homefield Energy, and NRG Energy, Inc. In addition to large providers, Spark must also compete with small local retail energy companies. Larger firms within the industry use economies of scale to secure more attractive contracts that drive down costs on a per unit basis. Meanwhile, smaller companies can act quickly to satisfy emerging market trends and reach specific geographic areas.

Supplier

Spark Energy purchases energy wholesale and distributes it to customers through an existing infrastructure. The Company purchases its natural gas mainly through market counterparties. Spark contracts with independent system operators (ISOs) and market counterparties to purchase its bulk electricity. ISOs are entities approved by the Federal Energy Regulatory Commission (FERC) that provide nondiscriminatory utilities transmission. There are currently seven ISOs in the U.S., serving the Northeast, Midwest, and California regions. In addition to purchasing from ISOs, Spark Energy leverages financial transactions to purchase and hedge its supply of energy.

Other

After‐sale service is a significant factor for utility providers. Adequate customer service is important for providers because it creates customer loyalty and maintains customer retention. Firms with an efficient, optimized customer service center combined with a strong organizational structure have an immediate competitive advantage.


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ABOUT SPARK ENERGY

Spark Energy, Inc. is a Houston‐based energy services company that supplies customers with alternative choices for their electricity and natural gas. Keith Maxwell III founded Spark Energy in 1999, and the Company launched its initial public offering on July 29, 2014 on the NASDAQ Global Select Market. Spark Energy is operating in the electricity and natural gas segments, offering competitive pricing, and carbon neutral (“green”) energy products across 66 utility service territories in 16 states. Figure 4 illustrates Spark’s service areas.

Figure 4: Spark Energy’s Combined Electricity and Gas Service Area by State

*Note: Spark Energy does not operate in Rhode Island Source: Spark Energy

Products

Spark Energy purchases electricity and natural gas in bulk, and later sells and distributes it to retail and commercial customers. Spark Energy distributes energy and natural gas through power lines, pipelines, and other transportation methods that local regulated utility companies maintain. Spark Energy management employs an asset optimization team that schedules the deliveries, long‐term transportation, and storage transactions of the electricity and natural gas.

Spark Energy acquires customers through several different sales channels, emphasizing door‐to‐door marketing, outbound telemarketing, and selling short‐term contracts. A determining factor in identifying a target customer segment is whether the specific utility service market is a purchase‐of‐receivables (POR) market. Purchase‐of‐receivables markets, markets in which local regulated utility services collect Spark Energy’s customer payments, greatly reduce customer credit risk for Spark.

Spark operates in areas shaded light gray

*


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In select markets, the Company offers renewable and green products. These products have been an increasingly profitable source of revenue for Spark. Green energy sales accounted for nearly 73% of new sales in 2014. Spark procures its green energy via renewable energy credits (RECs).

Concrete renewable power generation creates RECs, which are credits representing an amount of clean energy generation that has occurred. Various parties trade these credits on exchanges. Utility companies, when selling “green” energy to customers, combine the sold energy with purchased RCEs to represent the “green” aspect of that power. In theory, the renewable energy credits transfer the “green” aspect of renewable power to non‐renewable sources. Once renewable energy enters the power grid, it is indistinguishable from traditionally generated power.

Competitors and Competitive Advantages

Spark Energy competes with utility industry peers through competitive pricing, unique product offerings, and customer service. The Company’s direct competitors are large energy providers like NRG Energy, Direct Energy, FirstEnergy, and Just Energy, along with other like‐size retail energy providers. In certain markets, Spark and other retail energy providers compete against the incumbent utility.

As the utilities industry continues to mature, new entrants continue to enter the marketplace. In a recent development, many incumbent utility providers began spinning‐out retail operations to compete directly with the smaller providers. Spark has found the need to continuously adapt its product offerings and marketing techniques to boost its competitive advantage.

Although Spark experiences high competition levels across all of its operating segments, attaining POR relationships with the utilities promotes a unique challenge. Retail energy providers such as Spark can effectively eliminate customer credit risk by delegating billing and collection services to the local utility providers. Subsequently, demand for this type of relationship among market participants is very high. As of fiscal year end 2014, POR accounts represented 44% of Spark’s retail revenues.

Corporate Strategy

Spark recently shifted its strategic approach. On the heels of a tumultuous stretch in Southern California, Spark management has directed more attention to mitigating customer acquisition costs and increasing lifetime value in a push for sustained growth. Management has successfully targeted and acquired other market participants with established brand equity and marketing channels to expand further and will continue to evaluate similar opportunities on an ongoing basis in the near term. Longer‐term aspirations fixate on geographic and product expansion with a respective focus on the Northeast and green sourced energy.

Latest Developments

Spark Energy has completed three acquisitions since the start of 2015. On March 16, 2015, Spark acquired 33,500 natural gas customer accounts from Entrust Energy in the Northern California‐based Pacific Gas and Electric (PG&E) market for $2.83 million or $85 per customer.


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Spark Energy has served retail natural gas customers in Northern California since 2006. On May 12, 2015, Spark Energy announced its $20 million acquisition of Oasis Energy, a retail energy company serving approximately 40,000 electricity and natural gas clients in six states. Oasis Energy will continue to operate as a standalone brand. On July 9, 2015, Spark Energy announced its acquisition of CenStar Energy, a retail energy provider serving approximately 75,000 customers across New York, New Jersey, and Ohio. Spark Energy paid $8.3 million to purchase CenStar, and CenStar will continue to operate as a standalone brand. Spark Energy announced the closing of both the Oasis and CenStar transactions in July 2015.

PEER ANALYSIS

Spark Energy Inc.’s position as a publicly traded company in the highly competitive utilities industry is unique because of the Company’s diverse geographic market locations and small size.

To determine Spark’s peers, the team considered provider service areas, product offerings, and market capitalization. Our analyst team chose Unitil Corp., 8Point3 Energy Partners LP, NRG Energy Inc., and Dynegy Inc. as Spark Energy’s peers.

Table 1 provides a snapshot of Spark Energy in comparison to its publicly traded peers.

Table 1: Peer Group Analysis

* Estimated: Average of trailing 6 months Source: Thomson One, ETrade:Thomson Reuters October 2 2015

Company Ticker Market

Cap (MM) P/E TTM

P/BV Dividend Yield

Price/Cash Flow TTM

Spark Energy Inc. SPKE 226.12 *9.89 20.27 8.81% 4.69

Unitil Corp UTL 508 19.20 1.82 3.80% 9.79

8Point3 Energy Partners LP

CAFD 231 ‐ 1.93 5.60% ‐

NRG Energy, Inc. NRG 4,873.86 53.10 0.81 3.85% 2.51

Dynegy Inc. DYN 2,751.96 44.51 1.28 0.00% ‐

Peer Group Analysis Summary

Spark Energy has a price to equity (P/E) ratio of approximately 9.89, which is significantly below the industry average. This low P/E ratio indicates that investors are willing to pay less for Spark’s level of earnings.


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Spark Energy has a price to book value (P/B) ratio of 20.27, which is significantly above the industry average. The P/B value measures a Company’s value if it were liquidated. Spark’s high P/B value ratio indicates that the Company has relatively few assets per share in comparison to share price.

Spark Energy has a price to cash flow (P/CF) ratio of 4.69, which is significantly below the industry average. The P/CF ratio measures the market value of Spark relative to its cash flow. Spark’s low P/CF ratio indicates that the Company may be undervalued.

Unitil Corp. (UTL/NYSE)

Unitil Corp. is a utility holding company that distributes electricity and natural gas to residential and commercial customers in Maine, Massachusetts, and New Hampshire. Unitil’s subsidiaries include Unitil Energy Systems, Inc., Fitchburg Gas and Electric Light Company, Northern Utilities, Inc., and Granite State Gas Transmission, Inc., Unitil Power Corp., Unitil Service Corp., Unitil Realty Corp., Unitil Resources, Inc., and Usource Inc. Unitil’s operating utilities serve approximately 100,500 electric customers and 70,000 natural gas customers.

Unitil Corp.’s direct competition with Spark is limited to the Massachusetts market. At its current valuation, Unitil’s market capitalization is roughly double that of Spark. The company has diversified its business model that extends beyond the retail sale of energy and represents an industry peer farther along in its maturation process.

8Point3 Energy Partners LP (CFD/NASDAQ)

8Point3 Energy Partners is a growth company that owns, operates, and acquires solar energy generation projects. 8point3 Energy Partners is a YieldCo joint venture between First Solar and Sunpower. The company is located in California, Nevada, Arizona, Maryland, Colorado, New York, and Massachusetts.

8Point3 and Spark operate in the Southern California market to supply residential, commercial, and industrial electricity customers. As a full cycle green‐sourced energy provider, 8Point3 utilizes a different approach to address one of Spark’s most profitable segments. Both 8Point3 Energy and Spark have market capitalizations in the low $200 million range.

NRG Energy, Inc. (NRG/NYSE)

NRG Energy, Inc. is a power company that produces, sells, and delivers electricity, energy products, and services to residential, industrial, and commercial consumers. NRG serves almost three million retail customers in all 50 states and D.C. The company offers its electricity under two subsidiaries, NRG Home and Reliant. NRG uses nuclear fuel as well as various forms of fossil fuel including coal, natural gas, and oil as resources to produce over 52,000 megawatts of power generation. NRG is the largest of Spark Energy’s selected peers and directly competes with Spark for electricity customers in all three of Spark’s service areas except Florida.


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Dynegy Inc. (DYN/NYSE)

Dynegy Inc. operates power‐generating facilities in California, Massachusetts, Maine, Connecticut, New York, Illinois, Ohio, and Pennsylvania, serving 830,000 residential customers and 23,000 commercial, industrial, and municipal customers. The company operates its retail electricity providers under two subsidiaries: Homefield Energy and Dynegy Energy Services. Dynegy has 35 power stations that generate 26,000 megawatts of electricity. Dynegy’s power generates power through gas, oil, and coal combustion.

Dynegy, like Spark, services California, Illinois, and much of the Northeast. The company has a large market cap relative to Spark, but it is significantly smaller than NRG. Dynegy’s subsidiary, Homefield is one of Spark’s primary competitors in Texas. Both companies offer similar service lines.

MANAGEMENT PERFORMANCE AND BACKGROUND

Spark Energy’s management team is comprised of two groups and two committees: A four‐member management team, a Board of five Directors, an Audit Committee, and a Compensation Committee. Both Committees are comprised of members from the Board of Directors and Management Team.

Board of Directors

Spark Energy’s Board of Directors, as defined in the Company’ Corporate Governance Guidelines, will maintain director qualification standards as defined by The NASDAQ Stock Market LLC’s terms. The Board must have a majority of directors that are “Independent Directors.” Disinterested members of the Board will review the relationships between Spark Energy and each director annually to satisfy independence standards. The Board will select nominees for directorship, and an invitation to join the Board must be extended by the Board or its Chairman. Spark Energy does not have established term limits for Directors and has no policy that disallows the chief executive officer from sitting as chairman of the Board. Therefore, Spark’s Chief Executive Officer (CEO), Nathan Kroeker, currently sits on the Board as a Director.

Management Team

Spark Energy’s CEO, chief operating officer (COO), chief financial officer (CFO), vice president, general counsel, and corporate secretary form the Company’s management team. Currently, Spark’s position of COO is vacant. Because Spark Energy’s management and directors total a small number of individuals, all directors are members of either the Audit or Compensation committee. The Audit Committee will oversee the accounting and financial reporting processes as well as the audits of Spark Energy. The Compensation Committee will review and evaluate management annually. The goal of the Compensation Committee is to ensure that Spark’s compensation programs are highly competitive to attract and retain knowledgeable officers and leadership.


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Shareholders can also review Spark Energy’s management performance through the Company’s and its peers’ return on invested capital. Return on invested capital (ROIC) is a measure of Spark’s ability to generate new returns with its previously invested capital. Spark Energy had a high ROIC before becoming public and is now earning an ROIC much closer to its industry average. Table 2 shows Spark’s return on invested capital in comparison to peers averages.

Table 2: Return on Invested Capital Industry Comparison

Source: Bloomberg October 8, 2015

Year Spark Energy ROIC Average Peer ROIC

2013 48.22% 11.44%

2014 (5.26%) (2.41%)

Nathan Kroeker President and Chief Executive Officer

Nathan Kroeker joined Spark Energy in 2010 as Chief Financial Officer (CFO), and was appointed as President in April 2012 and Chief Executive Officer (CEO) in April 2014. Previously, Mr. Kroeker was Senior Vice President for the global energy supply and trading division of Macquarie Bank and served as CFO for the retail and wholesale businesses of Direct Energy. Mr. Kroeker received his bachelor's degree from the University of Manitoba and is a C.P.A. as well as a licensed Chartered Accountant in Canada. Mr. Kroeker’s experience in retail and wholesale energy, mergers and acquisitions, and public accounting were key in developing his management skills.

Georganne Hodges Chief Financial Officer

Georganne Hodges joined Spark Energy as CFO in November of 2013. Ms. Hodges has 25 years of retail and wholesale energy experience, and is a licensed C.P.A. Previously, she worked for Direct Energy’s retail energy business as CFO and in several other financial roles, and she began her career with Arthur Andersen auditing energy companies.

Gil Melman General Counsel

Gil Melman has served as Vice President, General Counsel and Corporate Secretary for Spark Energy since 2014. Prior to joining Spark, Mr. Melman served as General Counsel to Madagascar Oil Limited, and acted as General Counsel and In‐House Counsel to both energy companies and a private equity fund. He began his career practicing law in corporate securities and mergers and acquisitions in the energy industry.


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SHAREHOLDER ANALYSIS

Spark Energy utilizes a multilayer organizational structure to deliver economic and operational benefits to its founder and public shareholders. Spark HoldCo, LLC houses all of the Company’s operations. Spark Energy Inc. is the sole managing member of Spark Holdco, LLC. It carries full operational control and 21.82% of the economic interest in the Company. Keith Maxwell, Spark’s founder, owns 10.75 million Class B units of Spark Holdco, LLC via his holding company, Nudevco Retail Holdings, LLC, which entitles him to 78.18% of the economic interests in the Company. Mr. Maxwell holds all issued Class B shares, which are each convertible to one Class A share at any point.

As of October 6, 2015, Spark Energy Inc. had 13.85 million shares outstanding. At Spark’s initial public offering, the Company released three million Class A common stock shares with 21.82% voting power to the public, with 10.75 million Class B shares and 78.18% of voting power held by W. Keith Maxwell III. Spark Energy issued another 97,193 shares of Class A common stock during the second quarter of 2015. (See Figure 5: Shareholder Map)

Figure 5: Shareholder Map

Source: Spark Energy, Bloomberg

A total of 70 institutions and 112 funds hold Spark’s shares, with. J.P. Morgan Investment Management Inc. as the largest institutional owner.


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Inside Investors

Inside investors of the Company owned 77,059 shares, approximately 2.5% of Class A shares, as of October 6, 2015. The largest inside holder, William Keith Maxwell III, holds approximately 1.05% of Spark Energy’s total outstanding Class A shares. Although Mr. Maxwell only owns about 1% percent of the Company’s Class A shares personally, he is the majority shareholder of Spark Energy through his ownership of Spark’s Class B shares and parent Company NudevCo Partners LLC.

Three of five members of Spark’s Board of Directors own approximately 0.13% of the Company’s outstanding Class A shares. Mr. Kroeker and Mr. Maxwell are the remaining two Directors and hold a greater percentage of shares outstanding than the other directors because of their management roles within the Company. Table 3 contains information about the Company’s internal ownership of Class A shares. In total, eight inside investors own Spark Class A shares.

Table 3: Spark Energy’s Inside Investors

Holder Name Position Shares Percent

Outstanding

William Keith Maxwell III Founder 32,650 1.05

Nathan Kroeker President and Chief Executive Officer 21,036 0.68

Georganne Hodges Chief Financial Officer 6,518 0.21

Gil Melman Vice President, General Counsel 5,215 0.17

Kenneth M Hartwick Member of the Board of Directors 3,910 0.13

John Eads Member of the Board of Directors 3,910 0.13

James G Jones II Member of the Board of Directors 3,910 0.13

Source: Bloomberg November 27, 2014

Institutional Investors

Spark Energy’s ten largest investors are all institutional companies. JP Morgan Chase Bank is the largest of these institutional investors, with holdings totaling over 10% of Spark’s outstanding Class A shares. Table 4 lists the remaining nine largest shareholders of Spark’s stock. Seventy institutional investors currently own Spark Energy Class A shares.


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Table 4: Spark Energy’s Ten Largest Institutional Shareholders

Holder Name Portfolio Name Shares Percent

Outstanding

JP Morgan Chase Bank NA/London

N/A 316,875 10.23

Wellington Management Group LLP

Wellington Management Group LLP

216,453 6.99

Numeric Investors LLC Numeric Investor LLC 165,186 5.33

Crow Point Partners LLC Crow Point Partners LLC 126,000 4.07

Wells Fargo Funds Management LLC

Wells Fargo Advantage Global Dividend OPP FD

126,000 4.07

Bard Associates Inc. Bard Associates Inc. 113,517 3.67

Prudential Financial Inc. Multiple Portfolios 89,600 2.89

Blackrock Fund Advisors Blackrock Fund Advisors 86,830 2.8

Vantagepoint Investment Advisor

Multiple Portfolios 72,365 2.34

Vanguard Group Inc. Vanguard Group Inc. 69,205 2.23

Source: Bloomberg October 6, 2014

RISK ANALYSIS AND INVESTMENT CAVEATS

When Spark Energy Inc. (SPKE/NASDAQ) held its initial public offering (IPO) in 2014, the Company had already been in operation for 15 years. In its core market and operating segments, Spark has managed to achieve stability through a calculated approach to risk management. As the Company continues to expand, however, management has begun to face a set of new challenges. The Company’s aggressive acquisition strategy highlights its expansion efforts. The ability of management to identify and mitigate new risks is imperative to the Company’s continued success. Figure 6 highlights three company/customer acquisitions made in 2015.


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Figure 6: Company/Customer Acquisitions

Source: EIA October 8, 2015

Operational Risks

Several supply‐side risks inherently influence Spark’s day‐to‐day operations. Market prices for electricity and natural gas respond to a number of external factors and buyers have seen significant fluctuations over the recent short‐term and long‐term. Factors known to impact commodity prices include but are not limited to: weather conditions, seasonality (see Figure 7), economic conditions, demand fluctuations, going concern for other market participants, regulation. Commodity prices impact the Company’s cost structure and bottom line.

Figure 7: Energy Consumption Seasonality

Source: EIA October 8, 2015


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Seasonality and weather conditions have a significant impact on Spark’s operating performance. The demand for natural gas is highly seasonal, rising to its peak of consumption in the winter. As of fiscal year 2014, 45% of retail revenues were drawn from its natural gas segment. The Company relies on consumption forecasts to plan its commodity acquisition strategy to meet demand. Spark directs a significant amount of operational cash flow and its borrowing capacity to support an uptick in inventory purchases between April and October. Departures from expected consumption adversely affect operational activities. The Company engages in asset optimization practices to hedge against this risk. In periods of higher than anticipated consumption, demand may outpace Spark’s hedged supply volumes. A spike in demand invokes the need to purchase additional supply at a heightened cost, which can drive Spark’s operating losses significantly lower or even to a loss. Conversely, in periods of lower than expected consumption, unused supply exposes Spark to risk. As market prices fall, Spark will sell excess supply at a loss.

Regulatory Risks

The natural gas and electricity retail sales industry is highly regulated and additional legislation exposes market participants to even more detrimental effects. Regulatory risk independently influences Spark across all stages of its business model. Increased regulation can drive up the Company’s operational costs for compliance and marketing, cap sale prices in certain geographic areas, result in higher customer attrition, and raise tariffs owed to system operators. All of these factors have the potential to materially and adversely affect the Company’s operational performance.

Regulatory changes affect all market participants to some extent. Disparity exists between competitors in the ability to alter operational practices to adjust to current market conditions or comply with new regulations. Spark may potentially face severely limiting penalties or operating deficiencies if it fails to adapt at an adequate pace. Management’s ability to foresee and compensate for new legislation is key to limit the negative implications.

Financial Risks

Spark Energy faces significant investment risk, which involves the risk that the Company’s investments might fail, adversely impact the primary business of the Company or be unsuccessful. Spark’s investment risk with recent acquisitions has been low because the Company allows its acquired subsidiary to continue historical operations as a standalone company. This strategy has been successful because the companies already have a strong customer base and reputation in each respective market. Still, as Spark continues to look to acquisitions for growth, investment risk will increase.

Spark’s credit risk arises from its long‐term debt obligations, which consist of a working capital facility of $85 million, a senior revolving working capital facility of $60.0 million and a $25 million secured revolving acquisition credit line. Under Spark’s credit agreement, all of the Company’s assets and subsidiaries secure the long‐term debt.


19

The Company’s current ratio, a liquidity ratio which measures total assets compared to debt, has been above 100% for at least three years, although the ratio has been steadily declining, see Table 5. This ratio number highlights that Spark’s assets total more than debt, which is positive. Spark has not announced any intention to extend its credit line or take on new long‐term debt.

Table 5: Spark Energy Historical Current Ratios

YE 2012 YE 2013 YE 2014

Current Ratio 155% 138% 114%

Source: Nasdaq October 8, 2015

FINANCIAL PERFORMANCE AND PROJECTIONS

Spark’s revenue has grown 34% year to date. This significant growth is attributed to the Company’s acquisition of market peers Censtar and Oasis, as well as the Company's organic customer growth. Net income, rising alongside revenue, grew 24% year to date. Continued business expansion and operational efficiencies are likely catalysts for gross margin stabilization. In line with credit line requirements, Spark has increased its cash position from $2.5 million to $7.35 million, allowing the Company to pursue possible acquisitions and pay dividends. During our group’s site visit, Spark’s management voiced a commitment to paying a quarterly dividend of $ .3625 per share.

Operating Activities

Our analyst team designed a price times quantity model using long‐term growth rates to forecast Spark’s natural gas and electricity revenue. A combination of several factors drive the Company’s revenue growth. The main growth component is the net change in the annual customer base, which is Spark’s customer growth less customer attrition. We chose to use separate net customer growth rates for the Company’s natural gas and electricity segments. Two other significant components used in the model are average utilities usage data and commercial utilities pricing data. We collected average residential utility usage data and average residential price forecasts for the next ten years from the Energy Information Administration (EIA), a part of the U.S. Department of Energy. By multiplying together each product's customer base by the average customer product usage by the price, our team calculated Spark’s retail revenue. Projections of utilities pricing and customer growth were calculated based on historical trends and averages.

Retail costs of sales are incurred in acquiring energy supplies and customers. Changes in cost of sales are directly attributable to changes in aggregate sales. Our model forecasts Spark’s retail cost of sales by multiplying the quarter’s revenue by the percentage of cost of sales to revenue in the same quarter of the previous year. Spark’s selling, general and administrative expense (SG&A) is largely comprised of fixed costs. The Company’s fixed cost structure is related to office expenses. In forecasting this fixed cost component, we grew the expenses at a fixed rate.


20

Variable costs represent a less significant portion of the Company’s SG&A. The main driver of variable costs is Spark’s bad debt expense, which increases or decreases in proportion to accounts receivable (A/R). The Company’s A/R is forecasted by applying underlying growth of Spark’s customer base throughout the model.

Topline revenue growth is generally attributable to increases in the Company’s customer base. Aside from customer and product expansion, Spark’s revenue management hinges on the Company’s ability to control pricing, product costs, and customer acquisition costs. Maximizing operating efficiency is key to Spark’s business model. Management uses gross margin, in lieu of revenues, as a primary indicator of business performance. The Company is able to pass off its costs to customers, leaving a steady revenue‐generating margin. The Company also ensures this steady margin through product hedging. Spark continues to focus on customer growth and conducts comprehensive cost‐benefit analysis before acquiring new customers.

Acquisition Uncertainty

Management’s use of acquisitions to propel growth presents a potential exception to our forecasts. These transactions vary in size and are unpredictable in nature. Any mergers and acquisition activity that materially impacts Spark’s organizational structure, customer base, or service areas will alter fundamental assumptions used in this model.

SITE VISIT

The Burkenroad analyst team, accompanied by Burkenroad Reports founder Professor Peter Ricchiuti, visited Spark Energy’s Houston headquarters on October 9, 2015. In the Company’s newly acquired office space, the team briefly toured the customer relations, commodities trading, marketing, and organizational office segments. The tour culminated in the team’s introduction to Spark Energy’s management, including Chief Executive Officer, Nathan Kroeker, and Chief Financial Officer, Georganne Hodges. Management and the team discussed an array of topics, from Spark’s customer growth and revenue stream to the Company’s ownership and tax structure.

The most significant topic of discussion during the team’s site visit was the unusual ownership structure of Spark Energy. The Company’s ownership structure affords Spark a significant advantage in acquiring companies and paying an efficient tax rate. The Company’s ownership structure is discussed in‐depth in the “Shareholder Analysis” section. The Company’s founder and majority owner, Keith W. Maxwell, has a significant vested interest in the company because of his ownership of 10.75 million Class B shares. In the past, Mr. Maxwell has provided Spark with convertible, subordinated debt to aid the Company in acquiring other companies or customers. Previously, Mr. Maxwell purchased a company, Oasis Energy, and held it prior to Spark acquiring it. Spark Energy took advantage of this holding period to procure financing.

Overall, the team’s visit and discussion with management was extremely informative. Management’s openness and enthusiasm to discuss any topics brought up in conversation was refreshing and helpful. Spark Energy’s management team described an attainable vision for the Company that plays on its strengths and improves its weaknesses.


21

INDEPENDENT OUTSIDE RESEARCH

Our team utilized several outside sources to conduct our research and to forecast Spark Energy’s valuation. Bloomberg, Yahoo Finance, and ThomsonOne provided important historical financial information. The U.S. Energy Information Administration (EIA) provided information on average energy use and historical/forecasted utilities pricing. Standard and Poor’s contributed information regarding the entire utilities industry for our industry analysis and comparison of peers. Several of Spark Energy’s analyst reports, Janney’s and Wunderlich Securities, aided the team in further forecasting and valuation.

Spark’s SEC filings provided the most information about Spark’s operations and expectations. The Company’s SEC filings allowed the team to recognize the Company’s revenue trends and important balance sheet items. Additionally, the filings highlighted important regulations, events, and items that significantly affect Spark’s operations. The filings’ information aided our team in developing a diverse set of questions to ask Spark’s management team.


22

ANOTHER WAY TO LOOK AT IT

ALTMAN Z‐SCORE

The Altman Z‐Score, developed by Edward I. Altman in 1968, is a predictor of the likelihood and risk of a company entering into bankruptcy. The Z‐Score is based on five ratios which include a weighted average of working capital, retained earnings, earnings before income and taxes (EBIT), market value of equity, and sales as a percentage of assets. A score under 1.8 predicts a company is likely to go bankrupt, while a score above 3.0 means a company has a lower likelihood of going bankrupt.

Spark Energy’s current Altman Z‐Score is 3.35 (see Table 6). This figure is relatively high, meaning that Spark has a low likelihood of going into bankruptcy. The company has no historical Z‐Scores to report.

Table 6: Spark Energy’s Altman Z ‐ Score

(X1) Working Capital/Total Assets 0.10

(X2) Retained Earnings/Total Assets (0.01)

(X3) EBIT/Total Assets (0.03)

(X4) Mkt Value of Eq/ BV of Total Liabilities 170

(X5) Sales/Total Assets 2.32

Z‐Score 3.35

*Z‐Score = 1.2(X1) + 1.4(X2) + 3.3(X3) + 0.6(X4) + 1(X5) Source: Bloomberg October 8, 2015

PETER LYNCH EARNINGS MULTIPLE VALUATION

Peter Lynch, author of “One Up On Wall Street”, is the creator of an efficient charting tool that simplifies investment decisions. This “Peter Lynch chart” plots a stock price versus its “earnings line.” The “earnings line” is a theoretical price equal to 15 times the earnings per share. If a stock traded below this line, Lynch would buy; however, if it traded above this line, he would sell.

Spark Energy does not have a sufficient amount of available historical information for our team to perform a complete Peter Lynch Analysis. At Spark Energy’s 2014 year end price of $14.09, Peter Lynch would not have invested in Spark Energy because of its negative earnings per share.


23

WWBD? What Would Ben (Graham) Do?

Ben Graham, known as the “Father of Fundamental Equity Analysis” as well as the leader of value investing, is the creator of an eight‐point model, which indicates the attractiveness of an individual stock to an investor. He looked for value‐oriented stocks as well as stocks that were once high but lost their appeal to investors, sometimes called “fallen angels.” Graham also sought to identify companies with a strong record of accomplishment and potential for consistent growth. Graham considers a Company that passes at least four of the model’s hurdles as attractive.

Spark Energy passes two of the Ben Graham’s eight hurdles. The Company’s stock pays a dividend yield of 7.7%, which is more than one‐half of a Ten‐year Treasury bond yield. Spark’s earnings to price yield of 5.32% is more than two times the yield of the Ten‐year Treasury, which is 4.40%.

The Company fails Ben Graham’s test for a variety of reasons. The team was not able to be calculate four hurdles of the Ben Graham Analysis because of a lack of historical information. Spark failed two hurdles outright. The Company failed one hurdle because its stock price is well above 150 percent of its book value per share. Spark fails a second hurdle because the Company’s total interest‐bearing debt is greater than its book value (see Figure 8).

Figure 8: Ben Graham Dial


24

Earnings per share (ttm) 0.91$ Price: 17.09$

Earnings to Price Yield 5.32%

10 Year Treasury (2X) 4.40%

P/E ratio as of 2014 A 10.6

SPARK ENERGY, INC. (NASD: SPKE)Ben Graham Analysis

Hurdle # 1: An Earnings to Price Yield of 2X the Yield on 10 Year Treasury

Yes

Hurdle # 2: A P/E Ratio Down to 1/2 of the Stocks Highest in 5 Yrs

Current P/E Ratio 18.8

Dividends per share (ttm) 1.33$ Price: 17.09$

Dividend Yield 7.77%

1/2 Yield on 10 Year Treasury 1.10%

Stock Price 17.09$

Book Value per share as of 9/30/15 0.83$

150% of book Value per share as of 9/30/15 1.25$

Interest‐bearing debt as of 9/30/15 31,306$

Book value as of 9/30/15 11,848$

Current assets as of 9/30/15 99,921$

Current liabilities as of 9/30/15 79,584$

Current ratio as of 9/30/15 1.3

N/A

Hurdle # 3: A Dividend Yield of 1/2 the Yield on 10 Year Treasury

Yes

Hurdle # 4: A Stock Price less than 1.5 BV

No

Hurdle # 5: Total Debt less than Book Value

No

Hurdle # 6: Current Ratio of Two or More

N/A

Hurdle # 7: Earnings Growth of 7% or Higher over past 5 years

EPS for year ended 2014 A 1.33$

N/A

Hurdle # 8: Stability in Growth of Earnings

EPS for year ended 2014 A 1.33$ N/A

Stock price data as of November 17, 2015

N/A

Sparke

Energy Inc. (SPKE)

BURKEN

ROAD REP

ORTS (www.burken

road

.org)

November 17, 2015

25

SPARK ENER

GY,

INC. (NASD

: SPKE)

Quarterly and Annual

Earnings

In th

ousands

For the period ended

Retail revenues

Net

asset

optimization revenues

Total R

evenues

Operating expen

ses:

Retail cost

of sales

Selling,

general

and administrative

Dep

reciation and amortization

Total operating expenses

Operating income (loss)

Other income (e

xpen

se):

Interest

expense

Interest

and other

income

Total other

Income (loss) b

efore

income ta

xes

Income ta

x expense

(ben

efit)

Net

income (loss)

Less: n

et income (loss) a

ttributable

to non‐controlling interests

Net

income attributable

to Spark En

ergy,

Inc.

stockholders

Net

income (loss) p

er common share:

Basic

Net

income (loss)

2013 A

316,776

$

314

317,090

233,026

35,020

16,215

284,261

32,829

(1,714)

353

(1,361)

31,468

56

31,412

$

2014

A31‐M

ar‐15 A

30‐Jun‐15 A

30‐Sep

‐15 A

31‐Dec‐15 E

2015 E

31‐M

ar‐16 E

30‐Jun‐16 E

30‐Sep

‐16 E

31‐Dec‐16 E

2016 E

320,558

$

99,874

$

65

,500

$

91,812

$

122

,948

$

380,134

$

119,253

$

102,037

$

122,241

$

149,776

$

493,307

$

2,31

8

1,929

(67)

(545)

909

2,226

556

213

283

490

1,544

322,876

101,803

65,433

91,267

123

,857

382,360

119,810

102,250

122,524

150,266

494,851

258,616

69,08

5

42,120

60,967

99,199

271,371

$

82,490

65,615

81,173

120,844

350,122

$

45,880

14,70

4

12,978

15,493

13,489

56,664

$

13,677

13,870

14,066

14,268

55,88

1$

22,221

4,278

5,231

7,557

765

17,831

765

762

758

757

3,042

$

326,717

88,06

7

60,329

84,017

113

,453

345,866

96,932

80,246

95,997

135,869

409,045

(3,841)

13,73

6

5,104

7,250

10,404

36,494

22,878

22,004

26,527

14,398

85,806

(1,578)

(381)

(207)

(800)

(429)

(1,817

)

(321)

(318)

(366

)

(357)

(1,362)

263

135

187

5

368

695

279

566

1,098

1,606

3,549

(1,315)

(246)

(20)

(795)

(61)

(1,122

)

(42)

247

732

1,249

2,187

(5,156)

13,49

0

5,084

6,455

10,343

35,372

22,836

22,251

27,259

15,647

87,993

(891)

561

459

580

3,827

5,427

8,449

8,233

10

,086

5,789

32,557

(4,265)

$

12,929

$

4,625

$

5,875

$

6,516

$

29,945

$

14,387

$

14,018

$

17,173

$

9,857

$

55,43

5$

10,52

0

3,917

4,561

5,213

24,211

11,509

11,215

13,739

7,886

44,348

(4,265)

$

2,40

9$

708

$

1,314

$

1,303

$

5,734

$

2,877

$

2,804

$

3,435

$

1,971

$

11,08

7$

(0.02)

$

0.80

$

0.23

$

0.42

$

0.43

$

1.90

$

0.94

$

0.90

$

1.08

$

0.61

$

3.50

$

2016 E

201

5 E

Net

income (loss) e

xcluding non‐recurring items

Diluted

Net

income (loss)

(0.02)

$

0.80

$

0.23

$

0.42

$

0.43

$

1.90

$

0.94

$

0.90

$

1.08

$

0.61

$

3.50

$

.

(0.02)

$

0.80

$

0.23

$

0.31

$

0.39

$

1.77

$

0.85

$

0.83

$

1.01

$

0.58

$

3.26

$

Net

income (loss) e

xcluding non‐recurring items

(0.02)

$

0.80

$

0.23

$

0.31

$

0.39

$

1.77

$

0.85

$

0.83

$

1.01

$

0.58

$

3.26

$

Weighted average

shares

outstanding:

Basic

Diluted

SELECTED

COMMON‐SIZE AMOUNTS

3,00

0

3,000

3,000

3,097

3,026

3,013

3,076

3,121

3,166

3,218

3,168

3,00

0

3,000

3,000

14,232

14,161

14,148

14,211

14,256

14,301

14,353

14,303

Retail cost

of sales

Selling,

general

and administrative

Dep


Operating income (loss)

73.56%

11.06%

5.12%

10.36%

80.68%

69.17%

64.31%

66.40%

80.68%

71.39%

69.17%

64.31%

66.40%

80.68%

70.97%

14.31%

14.72%

19.81%

16.87%

10.97%

14.91%

11.47%

13.59%

11.51%

9.53%

11.33%

6.93%

4.28%

7.99%

8.23%

0.62%

4.69%

0.64%

0.75%

0.62%

0.51%

0.62%

‐1.20%

13.75%

7.79%

7.90%

8.46%

9.60%

19.18%

21.56%

21.70%

9.61%

17.39%

Income (loss) b

efore

income ta

xes

9.93%

‐1.61%

13.51%

7.76%

7.03%

8.41%

9.31%

19.15%

21.81%

22.30%

10.45%

17.84%

Net

income (loss)

YEAR TO

YEA

R CHANGE

9.92%

‐1.33%

12.95%

7.06%

6.40%

5.30%

7.88%

12.06%

13.74%

14.05%

6.58%

11.24%

Retail cost

of sales

Selling,

general

and administrative

n/a

n/a

11%

‐22%

‐20%

18%

50%

5%

19%

56%

33%

22%

29%

31.01%

81.24%

33.15%

45.69%

‐22.41%

23.51%

‐6.98%

6.87%

‐9.21%

5.77%

‐1.38%

Income (loss) b

efore

income ta

xes

n/a

‐116.38%

106.27%

142

6.73%

525.48%

‐179.19%

‐786.04%

69.28%

337

.67%

322.30%

51.28%

148.76%

Net

income (loss)

n/a

‐113.58%

98.66%

220

1.00%

1302.15%

‐157.19%

‐802.11%

11.27%

203

.10%

192.31%

51.28%

85.12%

Sparke

Energy Inc. (SPKE)

BURKEN

ROAD REP

ORTS (www.burken

road

.org)

November 17, 2015

26

SPARK ENERGY, INC. (NASD: SPKE)

Quarterly and Annual Balance

Sheets

In thousands

As of

Cash

and cash

equivalents

Restricted

cash

Accounts

receivable, net of allowance

Accounts

receivable‐affiliates

Inventories

Fair

Value of derivative assets

Customer acquisition

costs

Intangible

assets

‐ customer acquisitions net

Acquired

customer intangibles—

current,

net

Prepaid

assets

Prepaid

assets

affiliates

Deposits

Current deferred tax asset

Other current assets

Total current assets

Property and equipment,

net

Fair

value of derivative assets


costs

Intangible

assets

‐ customer acquisitions

Acquired

Customer Intangibles

Tradmarks

Deferred tax assets

Goodwill

Other assets

Total assets

Current liabilities:

Accounts

payable

Accounts

payable‐affiliates

Accrued liabilities

Fair

value of derivative liabilities

Note

Payable

2013 A 7,189

$

62,678

6,794

4,322

8,071

4,775

1,032

6,430

101,291

4,817

6

2,901

58

109,073

$

36,971

$

6,838

1,833

27,500

2014 A

31‐M

ar‐15 A

30‐Jun‐15 A

30‐Sep‐15 A

31‐Dec‐15 E

2015 E

31‐M

ar‐16 E

30‐Jun‐16 E

30‐Sep‐16 E

31‐Dec‐16 E

2016 E

4,359

$

5,179

$

4,237

$

7,355

$

5,576

$

5,576

$

11,317

$

21,960

$

32,119

$

40,064

$

40,064

$

707

63,797

58,926

40,011

50,284

46,185

46,185

45,290

38,751

45,920

56,263

56,263

1,231

1,025

534

1,447

588

588

577

494

585

717

717

8,032

511

2,945

5,230

601

601

30

229

348

37

37

216

57

924

129

129

129

129

129

129

129

129

12,369

13,762

14,514

15,260

15,260

15,260

15,260

15,260

15,260

15,260

15,260

486

739

1,421

1,439

1,439

1,439

1,439

1,439

1,439

1,439

1,439

5,979

5,979

5,979

5,979

5,979

5,979

5,979

5,979

1,236

1,208

789

420

420

420

420

420

420

420

420

173

120

120

120

120

120

120

120

120

10,569

8,128

5,335

6,952

7,266

7,266

7,594

7,937

8,296

8,672

8,672

803

803

803

803

803

803

803

803

2,987

2,787

2,615

4,503

4,503

4,503

4,503

4,503

4,503

4,503

4,503

105,989

92,322

73,498

99,921

88,870

88,870

93,461

98,025

115,922

134,405

134,405

4,221

4,263

4,448

4,422

4,483

4,483

4,333

4,087

3,933

4,002

4,002

3,499

2,976

4,450

4,618

4,618

4,618

4,618

4,618

4,618

4,618

4,618

1,015

1,253

2,292

1,971

1,971

1,971

1,971

1,971

1,971

1,971

1,971

5,979

5,979

5,979

5,979

5,979

5,979

5,979

5,979

1,226

1,226

1,226

1,226

1,226

1,226

1,226

1,226

24,047

24,206

23,770

23,196

23,196

23,196

23,196

23,196

23,196

23,196

23,196

18,385

18,385

18,385

18,385

18,385

18,385

18,385

18,385

149

148

82

735

735

735

735

735

735

735

735

138,397

$

125,691

$

108,540

$

160,453

$

149,463

$

149,463

$

153,904

$

158,222

$

175,965

$

194,517

$

194,517

$

38,210

$

31,534

$

26,504

$

28,731

$

30,140

$

30,140

$

25,961

$

21,437

$

25,444

$

36,138

$

36,138

$

1,017

1,432

789

1,867

795

795

7,195

7,743

7,032

10,409

5,702

5,702

4,911

4,055

4,813

6,837

6,837

11,526

8,472

8,825

6,437

6,437

6,437

6,437

6,437

6,437

6,437

6,437

33,000

20,000

9,000

31,306

22,306

22,306

22,306

22,306

22,306

22,306

22,306

2016 E

2015 E

Other current liabilities

Total current liabilities

Fair


Payable

pursuant to

tax receivable

agreement ‐ affiliates

Long‐term

portion

of Senior Credit

Facility

Non‐current deferred

tax liability

Convertible

subordinated

notes to

affiliate

Other long‐term

liabilities

Total liabilities

Stockholders' equity:

Member's equity

Class

A common

stock

Class

B common

stock

73,142

18

73,160

35,913

1,868

2,541

673

834

834

834

834

834

834

834

834

92,816

71,722

52,823

79,584

66,214

66,214

60,450

55,069

59,834

72,552

72,552

478

487

531

873

873

873

873

873

873

873

873

20,767

20,767

20,767

20,767

20,767

20,767

20,767

20,767

20,767

20,767

20,767

15,919

15,919

15,919

15,919

15,919

15,919

15,919

15,919

824

824

824

824

824

824

824

824

6,307

6,307

6,307

6,307

6,307

6,307

6,307

6,307

219

315

1,553

1,605

1,605

1,605

1,605

1,605

1,605

1,605

1,605

114,280

93,291

75,674

125,879

112,509

112,509

106,745

101,364

106,129

118,847

118,847

30

30

31

31

31

31

31

31

32

32

32

108

108

108

108

108

108

108

108

108

108

108

Additional paid‐in

capital

Retained

earnings (deficit)

Total stockholders' equity

Non‐controlling interest

in Spark

HoldCo, LLC

Total liabilities and stockholders' equity

SELECTED

COMMON

SIZE BALANCE SHEET AMOUNTS (%

of net sales)

Accounts

receivable‐affiliates

Inventories


costs

35,913

109,073

$

2.14%

1.36%

1.51%

9,296

9,635

10,494

11,933

12,792

12,792

13,622

14,330

15,179

16,219

16,219

(775)

546

132

(224)

1,298

1,298

10,673

19,662

31,791

36,585

36,585

8,659

10,319

10,765

11,848

14,229

14,229

24,433

34,132

47,109

52,945

52,945

15,458

22,081

22,101

22,726

22,726

22,726

22,726

22,726

22,726

22,726

22,726

138,397

$

125,691

$

108,540

$

160,453

$

149,463

$

149,463

$

153,904

$

158,222

$

175,965

$

194,517

$

194,517

$

0.38%

1.03%

0.82%

1.58%

0.48%

0.15%

0.48%

0.48%

0.48%

0.48%

0.15%

2.51%

0.51%

4.50%

5.70%

0.49%

0.16%

0.03%

0.22%

0.28%

0.02%

0.01%

3.86%

13.78%

22.16%

16.62%

12.41%

4.01%

12.80%

14.96%

12.48%

10.19%

3.09%

Other assets

0.02%

0.05%

0.15%

0.13%

0.80%

0.60%

0.19%

0.62%

0.72%

0.60%

0.49%

0.15%

Accounts

payable

11.67%

11.92%

31.57%

40.46%

31.29%

24.51%

7.93%

21.77%

21.01%

20.81%

24.13%

7.33%

SELECTED

COMMON

SIZE BALANCE SHEET AMOUNTS (%

of total assets)

Total current assets

Property and equipment,

net

Other assets

92.87%

4.42%

0.05%

76.58%

73.45%

67.72%

62.27%

59.46%

59.46%

60.73%

61.95%

65.88%

69.10%

69.10%

3.05%

3.39%

4.10%

2.76%

3.00%

3.00%

2.82%

2.58%

2.24%

2.06%

2.06%

0.11%

0.12%

0.08%

0.46%

0.49%

0.49%

0.48%

0.46%

0.42%

0.38%

0.38%

Total current liabilities

Fair


67.06%

0.02%

67.07%

57.06%

48.67%

49.60%

44.30%

44.30%

39.28%

34.81%

34.00%

37.30%

37.30%

0.35%

0.39%

0.49%

0.54%

0.58%

0.58%

0.57%

0.55%

0.50%

0.45%

0.45%

Total stockholders' equity

32.93%

6.26%

8.21%

9.92%

7.38%

9.52%

9.52%

15.88%

21.57%

26.77%

27.22%

27.22%

Sparke

Energy Inc. (SPKE)

BURKEN

ROAD REP

ORTS (www.burken

road

.org)

November 17, 2015

27

SPARK ENER

GY,

INC. (NASD

: SPKE)

Quarterly and Annual

Statements

of C

ash Flows

In th

ousands

For the period ended

Cash Flow

From

Operations:

Net

income

Adjustmen

ts:

Dep


Deferred

income taxes

Stock

based

compensation

Amortization and write

off

of d

eferred

finan

cing costs

Allowance

for doubtful accounts

and bad

deb

t expense

(Gain) loss

on derivatives,

net

Curren

t period cash settlements

on derivatives,

net

Accretion of d

iscount to subordinated

convertible

notes to

affiliate

Changes in

assets

and liabilities:

Restricted Cash

Accounts

receivable

Accounts

receivable

‐ affiliates

Inventories

Customer a

cquisition costs

Prepaid expen

ses an

d other

current a

ssets

Intangible

assets ‐ customer

acquisitions

Other a

ssets

Accounts

payable

Accounts

payable‐affiliates

Accrued liabilities

Other liabilities

Other n

on‐curren

t liabilities

Net

cash provided

by (used in) o

perating activities

Cash flows from

investing activities

Purcha ses of p

roperty, plant a

nd equipment

Acquisition of C

enStar

and Oasis

net a

ssets

Investment in eRex

joint v

enture

Net

cash used in

investing activities

Cash flows from

financing activities

Borrowings

on notes payab

le and credit

facility

Payments

on notes payab

le and credit

facility

Deferred

financing costs

Member

contributions (distributions), net

Proceeds from

issuan

ce of C

lass

A common stock

Distributions of p

roceed

s from

offerting to

affiliate

Payment o

f note

payable

to NuDevco

Offering costs

Issuan

ce of convertible

subordinated notes to

affiliate

Pa yment o

f distributions to

Class

B non‐controlling unit

holders

Payment o

f dividends to

Class

A common shareh

olders

Contributions From

NuDevco

Restricted

stock

vesting

Net

cash provided

by (used in) financing activities

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents

at b

eginning of year

Cash and cash equivalents

at e

nd of year

Non‐ca sh investing an

d financing activities:

Interest

(net o

f amount capitalized)

2013 A

31,412

$

16,215

678

3

,101

(6,567)

(1,040)

6,338

13,369

(599

)

(8,257)

(1,917)

144

(8,397)

44,480

(1,481)

(1,481)

80,000

(62,50

0)

(532

)

(5

9,33

7)

(42,369)

$

630

6

,559

7,189

879

2014

A31‐M

ar‐15 A

30‐Jun‐15 A

30‐Sep

‐15 A

31‐Dec‐15 E

2015 E

31‐M

ar‐16 E

30‐Jun‐16 E

30‐Sep

‐16 E

31‐Dec‐16 E

2016 E

(4,265)

$

12,929

$

4,625

$

5,289

$

6,516

$

29,359

$

14,387

$

14,018

$

17,173

$

9,857

$

55,43

5$

22,221

4,278

5,230

8,365

765

18,638

765

762

758

757

3,042

(1,064)

(159)

436

595

872

858

550

609

833

858

2,850

830

709

849

1,041

3,429

631

50

51

194

295

10,164

2,947

1,232

1,903

1,316

7,398

1,291

1,104

1,309

1,603

5,307

14,535

1,305

4,055

75

8

6,118

3,47

9

(4,191)

(4,356)

(6,573)

(15,120)

21

21

(707)

707

707

(11,283)

1,924

17,684

(1,042)

2,782

21,348

(395)

5,434

(8,477)

(11,947)

(15,385)

5,56

3

207

491

(914)

859

643

11

83

(91)

(132)

(128)

(3,711)

7,521

(2,434)

(2,109)

4,629

7,607

571

(199)

(119

)

312

565

(26,191)

(5,629)

(6,180)

(5,916)

(17,725)

(6,905)

2,621

2,989

5,500

11,110

(90)

(676)

(2,044)

(56)

(2,776

)

(1,545)

65

(321)

(314)

(570)

(328)

(343)

(359

)

(375)

(1,406)

1,44

9

(6,226)

(5,861)

(2,523)

1,409

(13,201)

(4,179)

(4,524)

4,007

10,694

5,998

1,01

7

415

(643)

1,077

(1,072)

(223)

(795)

(795)

(4,707)

(4,707

)

(791)

(856)

758

2,023

1,135

1,86

7

673

(1,868)

(339)

(1,534

)

(149)

1,553

53

1,606

5,87

4

19,24

6

15,634

4,795

13,041

52,716

11,368

16,188

15,808

13,834

57,197

(3,040)

(441)

(416)

(398)

(826)

(2,081

)

(614)

(517)

(604

)

(826)

(2,561)

(41,234)

(41,234)

(330)

(330)

(3,040)

(441)

(416)

(41,962)

(826)

(43,645)

(614)

(517)

(604

)

(826)

(2,561)

78,500

3,000

3,000

46,225

52,225

(44,000)

(16,000

)

(14,000)

(8,000)

(9,000)

(47,000)

(402)

(36,406)

50,220

(47,554)

(50)

(2

,667)

7,075

7,075

(2,584)

(3,897)

(3,897)

(3,897)

(3,897)

(15,588)

(3,897)

(3,897)

(3,897)

(3,897)

(15,588)

(721)

(1,088)

(1,122)

(1,123)

(1,097)

(4,430

)

(1,115)

(1,131)

(1,148)

(1,167)

(4,561)

129

129

(270)

5

(265)

(5,664)

$

(17,985)

$

(16,160)

$

40,285

$

(13,994)

$

(7,854)

$

(5,012

)$

(5,028)

$

(5,045)

$

(5,064)

$

(20,149)

$

(2,830)

820

(942)

3,118

(1,779)

1,217

5,741

10,643

10,160

7,944

34,488

7,18

9

4,359

5,179

4,237

7,355

4,359

5,576

11,317

21,960

32,119

5,576

4,35

9

5,179

4,237

7,355

5,576

5,576

11,317

21,960

32,119

40,064

40,064

860

366

232

800

429

1,817

321

318

366

357

1,362

2016 E

201

5 E

Operating cash

flow

per

share

excluding changes in

working capital

Operating cash

flow

per

share

including changes in

working capital

15.52

$

5.90

$

3.96

$

0.80

$

0.67

$

3.56

$

1.22

$

1.16

$

1.40

$

0.92

$

4.70

$

1.96

$

6.42

$

5.21

$

0.34

$

0.92

$

3.73

$

0.80

$

1.14

$

1.11

$

0.96

$

4.00

$

Sparke

Energy Inc. (SPKE)

BURKEN

ROAD REP

ORTS (www.burken

road

.org)

November 17, 2015

28

SP

AR

K E

NE

RG

Y, I

NC

. (N

AS

D:

SP

KE

)R

atio

s

For

th

e p

erio

d e

nd

ed

Pro

du

ctiv

ity R

atio

s

Re

ceiv

abl

es

turn

ove

r

201

3 A

9.12

20

14 A

31-M

ar-

15

A3

0-J

un-

15

A3

0-S

ep-

15

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ec-

15

E 2

015

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r-1

6 E

30

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n-1

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1-D

ec-

16

E 2

016

E

4.77

1.6

01.

471

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2.20

6.80

2.2

52.

562

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2.89

9.5

1

2016

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15 E

Inve

nto

ry t

urn

ove

r10

7.8

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1.87

16.1

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11.6

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t fix

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et t

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27

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# o

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ses

in p

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33

Liq

uid

ity M

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sure

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ratio

1.38

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91.

391

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1.34

1.34

1.5

51.

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1.8

5

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ick

ratio

1.05

0.76

0.9

10.

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0.79

0.79

0.9

51.

111

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4

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Ca

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56,0

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Fin

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cia

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k (L

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l deb

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3.20

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Inte

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19.3

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Op

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ting

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Re

turn

on

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uity

174

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136

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9.70

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65.0

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Ea

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bef

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rest

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7.3

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12.3

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4.05

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6.8

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%

EB

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A m

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5.59

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7%

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22.

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23.2

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18.7

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EB

ITD

A/A

sse

ts9

0.58

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3.47

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16.9

9%9

.05%

47.5

0%

THIS PAGE LEFT INTENTIONALLY BLANK

BURKENROAD REPORTS RATING SYSTEM

MARKET OUTPERFORM: This rating indicates that we believe forces are in place that would enable this company's stock to produce returns in excess of the stock market averages over the next 12 months.

MARKET PERFORM: This rating indicates that we believe the investment returns from this company's stock will be in line with those produced by the stock market averages over the next 12 months.

MARKET UNDERPERFORM: This rating indicates that while this investment may have positive attributes, we believe an investment in this company will produce subpar returns over the next 12 months. BURKENROAD REPORTS CALCULATIONS

CPFS is calculated using operating cash flows excluding working capital changes.

All amounts are as of the date of the report as reported by Bloomberg or Yahoo Finance unless otherwise noted. Betas are collected from Bloomberg.

Enterprise value is based on the equity market cap as of the report date, adjusted for long‐term debt, cash, & short‐term investments reported on the most recent quarterly report date.

12‐month Stock Performance is calculated using an ending price as of the report date. The stock performance includes the 12‐month dividend yield.

2015‐2016 COVERAGE UNIVERSE Amerisafe Inc. (AMSF) Bristow Group Inc. (BRS) CalIon Petroleum Company (CPE) Cal‐Maine Foods Inc. (CALM) Carbo Ceramics Inc. (CRR) Cash America International Inc. (CSH) Conn's Inc. (CONN) Crown Crafts Inc. (CRWS) Denbury Resources Inc. (DNR) EastGroup Properties Inc. (EGP) Era Group Inc. (ERA) Evolution Petroleum Corp. (EPM) The First Bancshares (FBMS) Globalstar (GSAT) Gulf Island Fabrication Inc. (GIFI) Hibbett Sports (HIBB) Hornbeck Offshore Services Inc. (HOS) IBERIABANK Corp. (IBKC) ION Geophysical Corp. (IO) Key Energy Services (KEG)

Marine Products Corp. (MPX) MidSouth Bancorp Inc. (MSL) Newpark Resources Inc. (NR) PetroQuest Energy Inc. (PQ) Pool Corporation (POOL) Powell Industries Inc. (POWL) Rollins Incorporated (ROL) RPC Incorporated (RES) Ruth’s Hospitality Group Inc. (RUTH) Sanderson Farms Inc. (SAFM) SEACOR Holdings Inc. (CKH) Sharps Compliance Inc. (SMED) Spark Energy Inc. (SPKE) Stone Energy Corp. (SGY) Sunoco LP (SUN) Superior Energy Services Inc. (SPN) Superior Uniform Group Inc. (SGC) Team Incorporated (TISI) Vaalco Energy Inc. (EGY) Willbros Group Inc. (WG)

PETER RICCHIUTI Director of Research Founder of Burkenroad Reports [email protected] ANTHONY WOOD Senior Director of Accounting [email protected]

DANIEL BROWNFIELD GRACE CAMMACK ALAN POSNER RUBEN FLORES DELGADO Associate Directors of Research

BURKENROAD REPORTS Tulane University New Orleans, LA 70118‐5669 (504) 862‐8489 (504) 865‐5430 Fax

To receive complete reports on any of the companies we follow, contact:Peter Ricchiuti, Founder & Director of Research

Tulane UniversityFreeman School of BusinessBURKENROAD REPORTS

Phone: (504) 862-8489Fax: (504) 865-5430

E-mail: [email protected] visit our web site at www.BURKENROAD.org

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Named in honor of William B. Burkenroad Jr., an alumnus and a longtime supporter of Tulane’s business school, and funded through contributions from his family and friends, BURKENROAD REPORTS is a nationally recognized program, publishing objective, investment research reports on public companies in our region. Students at Tulane University’s Freeman School of Business prepare these reports.Alumni of the BURKENROAD REPORTS program are employed at a number of highly respected financial institutions including:ABN AMRO Bank · Aegis Value Fund · Invesco/AIM Capital Management · Alpha Omega Capital Partners · American General Investment Management · Ameriprise Financial · Atlas Capital · Banc of America Securities · Bank of Montreal · Bancomer · Barclays Capital · Barings PLC · Bearing Point · Bessemer Trust · Black Gold Capital· Bloomberg · Brookfield Asset Management · Brown Brothers Harriman Capital · Blackrock Financial Management · Boston Consulting Group · Buckingham Research · California Board of Regents · Cambridge Associates· Canaccord Genuity · Cantor Fitzgerald · Chaffe & Associates · Citadel Investment Group · Citibank · Citigroup Private Bank · City National Bank · Cornerstone Resources · Credit Suisse · D. A. Davidson & Co. · Deutsche Banc · Duquesne Capital Management · Equitas Capital Advisors· Factset Research · Financial Models · First Albany · Fiduciary Trust · Fitch Investors Services · Forex Trading · Franklin Templeton · Friedman Billings Ramsay · Fulcrum Global Partners · Gintel Asset Management · Global Hunter Securities · Goldman Sachs · Grosever Funds · Gruntal & Co. · Guggenheim Securities , LLC · Hancock Investment Services · Healthcare Markets Group · Capital One Southcoast · Howard Weil Labouisse Friedrichs · IBERIABANK Capital Markets · J.P. Morgan Securities · Janney Montgomery Scott · Jefferies & Co. · Johnson Rice & Co. · KBC Financial · KDI Capital Partners · Key Investments · Keystone Investments · Legacy Capital · Liberty Mutual · Lowenhaupt Global Advisors · Mackay Shields · Manulife/John Hancock Investments · Marsh & McLennan · Mercer Partners · Merrill Lynch · Miramar Asset Management · Moodys Investor Services · Morgan Keegan · Morgan Stanley · New York Stock Exchange · Perkins Wolf McDonnell · Piper Jaffray & Co. · Professional Advisory Services · Quarterdeck Investment Services · RBC · Raymond James · Restoration Capital · Rice Voelker, LLC · Royal Bank of Scotland· Sandler O'Neill & Partners · Sanford Bernstein & Co. · Scotia Capital · Scottrade · Second City Trading LLC · Sequent Energy · Sidoti & Co · Simmons & Co. · Southwest Securities · Stephens & Co. · Sterne Agee · Stewart Capital LLC · Stifel Nicolaus · Sun-Trust Capital Markets · Susquehanna Investment Group · Thomas Weisel Partners · TD Waterhouse Securities · Texas Employee Retirement System · Texas Teachers Retirement System · ThirtyNorth Investments · Thornburg Investment Management · Tivoli Partners · Tudor Pickering & Co. · Tulane University Endowment Fund · Turner Investment Partners · UBS · Value Line Investments · Vaughan Nelson Investment Management · Wells Fargo Capital Management · Whitney National Bank · William Blair & Co. · Zephyr Management

SPKE Burkenroads Report

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