11. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. This includes the credit standing of counterparties involved and the impact of credit enhancements.

We apply fair value measurements to our commodity derivative instruments and contingent payment arrangements based on the following fair value hierarchy, which prioritizes the inputs to the valuation techniques used to measure fair value into three broad levels:


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

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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 our 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. These levels can change over time. 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 tables present assets and liabilities measured and recorded at fair value in our consolidated balance sheets on a recurring basis by and their level within the fair value hierarchy (in thousands):



	Level 1			Level 2			Level 3		Total
December 31, 2019
Non-trading commodity derivative assets	$	—		$	401		$	—	$	401
Trading commodity derivative assets	—			169			—		169
Total commodity derivative assets	$	—		$	570		$	—	$	570
Non-trading commodity derivative liabilities	$	(1,666	)	$	(18,772	)	$	—	$	(20,438	)
Trading commodity derivative liabilities	—			—			—		—
Total commodity derivative liabilities	$	(1,666	)	$	(18,772	)	$	—	$	(20,438	)
Contingent payment arrangement	$	—		$	—		$	—	$	—



	Level 1			Level 2			Level 3			Total
December 31, 2018
Non-trading commodity derivative assets	$	104		$	9,821		$	—		$	9,925
Trading commodity derivative assets	44			596			—			640
Total commodity derivative assets	$	148		$	10,417		$	—		$	10,565
Non-trading commodity derivative liabilities	$	(352	)	$	(5,685	)	$	—		$	(6,037	)
Trading commodity derivative liabilities	(75		)	(472		)	—			(547		)
Total commodity derivative liabilities	$	(427	)	$	(6,157	)	$	—		$	(6,584	)
Contingent payment arrangement	$	—		$	—		$	(1,328	)	$	(1,328	)

We had no transfers of assets or liabilities between any of the above levels during the years ended December 31, 2019, 2018 and 2017.

Our derivative contracts include exchange-traded contracts valued utilizing readily available quoted market prices and non-exchange-traded contracts valued using market price quotations available through brokers or over-the-counter and on-line exchanges. In addition, in determining the fair value of our derivative contracts, we apply a credit risk valuation adjustment to reflect credit risk, which is calculated based on our or the counterparty’s historical credit risks. As of December 31, 2019 and 2018, the credit risk valuation adjustment was a gain of $0.2 million and zero, respectively.

The contingent payment arrangements referred to above reflect estimated earnout obligations incurred in relation to our acquisition of the Major Energy Companies in 2016.

Contingent Payment Arrangements

The following tables present a roll forward of our contingent payment arrangements, which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3):



	Major Earnout and Stock Earnout
Fair Value at December 31, 2017	$	4,650
Change in fair value of contingent consideration, net	$	(1,715	)
Payments and settlements	(1,607		)
Fair Value at December 31, 2018	$	1,328
Transfer	(1,328		)
Fair Value at December 31, 2019	$	—

The Major Earnout is based on the achievement by the Major Energy Companies of certain performance targets over a 33 month period following the date our affiliate acquired the Major Energy Companies and ended on December 31, 2018. Under the Earnout provisions, the previous members of Major Energy Companies were 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 was 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 earned such maximum Major Earnout payments, NG&E would be entitled to additional consideration up to a maximum of 400,000 shares of Class B common stock (and a corresponding number of Spark HoldCo units). In determining the fair value of the Major Earnout and the Stock Earnout, we forecasted certain expected performance targets and calculated the probability of such forecast being attained. The impact of the fair value decreases for the years ended December 31, 2018 and 2017 were recorded in general and administrative expenses. The $1.3 million has not been paid as of December 31, 2019 due to ongoing litigation with the Major sellers. It was transferred to accrued liabilities as of December 31, 2019, as discussed further in Note 14 "Commitments and Contingencies."