Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

 

**x****           ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the fiscal year ended June 30, 2010**

 

**OR**

 

**o****              TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**For the transition period from             to              **

 

**Commission File Number 333-138425**

 

**MXENERGY HOLDINGS INC.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Delaware**                             | ** ** | **20-2930908**                       |
|------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of          |       | (I.R.S. Employer Identification No.) |
| Incorporation or Organization)           |       |                                 |
|                                     |       |                                 |
| **595 Summer Street, Suite 300**    |       |                                 |
| **Stamford, Connecticut**                | ** ** | **06901**                            |
| (Address of Principal Executive Offices) |       | (Zip Code)                           |

 

**(203) 356-1318**

(Registrant’s telephone number, including area code)

 

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Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 under the Securities Act.  Yes o No x

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Securities Act.  Yes o No x

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes o No x

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will notbe contained, the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 

| Large accelerated filer o                |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer x                  |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act).  Yes o No x

 

Aggregatemarket value of voting and non-voting common equity held by non-affiliates ofthe registrant:  Not applicable.  The registrant has no publicly traded equitysecurities.

 

Asof August 31, 2010, there were 33,710,902 shares of the Registrant’s Class ACommon Stock (par value $0.01 per share), 4,002,290 shares of the Registrant’sClass B Common Stock (par value $0.01 per share) and 16,438,669 shares of theRegistrant’s Class C Common Stock (par value $0.01 per share) outstanding.

 

Documents incorporated by reference: **None**

 

 

 

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**MXENERGY HOLDINGS INC.**

**ANNUAL REPORT ON FORM 10-K**

**FOR THE FISCAL YEAR ENDED JUNE 30, 2010**

 

**TABLE OF CONTENTS**

 
| **Item  Number**  | ** **                                                                                                          | ** ** | **Page  Number** |
|-------------------|---------------------------------------------------------------------------------------------------------------------|------------|------------------|
|              |                                                                                                                |       |             |
| **PART I**   |                                                                                                                |       |             |
| 1.                | Business                                                                                                            |       | 4                |
| 1A.               | Risk Factors                                                                                                        |       | 18               |
| 1B.               | Unresolved Staff  Comments                                                                                          |       | 28               |
| 2.                | Properties                                                                                                          |       | 28               |
| 3.                | Legal Proceedings                                                                                                   |       | 28               |
| 4.                | (Removed and  Reserved)                                                                                             |       | 28               |
|              |                                                                                                                |       |             |
| **PART II**  |                                                                                                                |       |             |
| 5.                | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       | 29               |
| 6.                | Selected  Financial Data                                                                                            |       | 30               |
| 7.                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 35               |
| 7A.               | Quantitative  and Qualitative Disclosures about Market Risk                                                         |       | 61               |
| 8.                | Financial  Statements and Supplementary Data                                                                        |       | 64               |
| 9.                | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                               |       | 113              |
| 9A(T).            | Controls and  Procedures                                                                                            |       | 113              |
| 9B.               | Other Information                                                                                                   |       | 115              |
|              |                                                                                                                |       |             |
| **PART III** |                                                                                                                |       |             |
| 10.               | Directors,  Executive Officers and Corporate Governance                                                             |       | 116              |
| 11.               | Executive  Compensation                                                                                             |       | 121              |
| 12.               | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholders Matters                    |       | 138              |
| 13.               | Certain Relationships and Related  Transactions, and Director Independence                                          |       | 141              |
| 14.               | Principal  Accountant Fees and Services                                                                             |       | 145              |
|              |                                                                                                                |       |             |
| **PART IV**  |                                                                                                                |       |             |
| 15.               | Exhibits  and Financial Statement Schedules                                                                         |       | 146              |
|              |                                                                                                                |       |             |
| **SIGNATURES**    |                                                                                                                | 147        |

 

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**Cautionary Note Regarding Forward-LookingStatements**

 

Somestatements in this Annual Report on Form 10-K (the “Annual Report”) are knownas “forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”), and Section 21E ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements include, but arenot limited to, statements about our plans, objectives, expectations andintentions and other statements contained in the Annual Report that are nothistorical facts and may relate to, among other things:

 

·                  future performance generally;

·                  our business goals, strategy, plans,objectives and intentions;

·                  our post-acquisition integration of acquiredbusinesses;

·                  expectations concerning future operations,margins, profitability, attrition, bad debts, expenses, interest rates,liquidity and capital resources; and

·                  expectations regarding the effectiveness ofour hedging practices and the performance of suppliers, pipelines andtransmission companies, storage operators, independent system operators,financial hedge providers, banks providing working capital and other counterpartiessupplying, transporting, and storing physical commodity.

 

Whenused in this Annual Report on Form 10-K, the words “may,” “will,” “should,” “expects,”“anticipates,” “intends,” “plans,” “believes,” “seeks,” “predicts,” “estimates,”“potential,” “continue,” “projected” and similar expressions are generallyintended to identify forward-looking statements, although the absence of such aword does not mean that such statement is not a forward-looking statement.

 

Forward-lookingstatements are subject to risks, uncertainties, and assumptions about us andour operations that are subject to change based on various important factors,some of which are beyond our control. The following factors, as well as the factors identified in “RiskFactors,” among others, could cause our financial performance to differsignificantly from the goals, plans, objectives, intentions and expectationsexpressed in our forward-looking statements:

 

·                  failures in our risk management policies andhedging procedures;

·                  shortfalls in marketing or unusual customerattrition that result in our purchases exceeding our supply commitments;

·                  unavailability or lack of reliability inmonthly settlement index prices;

·                  changes in the forward prices of natural gasand electricity;

·                  insufficient liquidity to properly implementour hedging strategy or manage commodity supply;

·                  changes in weather patterns from historicalnorms that affect customer consumption patterns;

·                  failure of our customers to pay their billsor our failure to maintain adequate billing and collection procedures;

·                  failure of LDCs (as defined herein) to payamounts owed to us when due;

·                  failure to collect imbalance receivables;

·                  inaccuracy of data in our billing systems;

·                  disruptions in local transportation andtransmission facilities;

·                  changes in regulations that affect ourability to use marketing channels;

·                  changes in statutes or regulations thataffect growth and commodity, operating or financing costs or otherwise impactour profitability;

·                  investigations by any state utilitycommissions, state attorneys general or federal agencies that could result infines, sanctions or damage to our reputation;

·                  failure to properly manage our growth;

·                  the loss of key members of management orfailure to retain employees;

·                  changes in general economic conditions;

·                  competition from utilities and othermarketers;

·                  malfunctions in computer hardware or softwareor in database management systems or power systems, due to mechanical or humanerror, that result in billing errors or problems with collections,reconciliation, accounting or risk management;

·                  natural disasters, including hurricanes; and

·                  our reliance on energy infrastructure andtransportation within the United States and Canada.

 

Therefore,we caution you not to place undue reliance on any forward-lookingstatements.  We undertake no obligationto publicly update or revise any forward-looking statements after the date ofthis Annual Report on Form 10-K to conform these statements to actualresults.  All forward-looking statementsattributable to us are expressly qualified by these cautionary statements.

 

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**PART I**

 

**ITEM 1.  BUSINESS**

 

**Definitions**

 

Referencesin this Annual Report to “Holdings” refer to MXenergy Holdings Inc., a Delawarecorporation.  References to “the Company,”“we,” “us,” “our,” or similar terms refer to Holdings together with itsconsolidated subsidiaries.

 

Referencesto “MMBtu” refer to a million British thermal units, a standard unit of heatingequivalent measure for natural gas. A unit of heat equal to 1,000,000 Btus, or1 MMBtu, is the thermal equivalent of approximately 1,000 cubic feet of naturalgas. One billion cubic feet, or BCF, of gas is approximately 1,000,000 MMBtus.

 

Referencesto “MWhr” refer to megawatt hours, each representing 1 million watt hours or athousand kilowatt hours, which is the amount of electric energy produced orconsumed in a period of time.

 

Referencesto “RCEs” refer to residential customer equivalents, each of which represents anatural gas customer with a standard consumption of 100 MMBtus per year or anelectricity customer with a standard consumption of 10 MWhrs per year. Thesequantities, which are used for convenience, represent the approximate amount ofnatural gas or power used by a typical household in some parts of the country.

 

Referencesto “LDC” refer to a local distribution company, or utility, that provides thedistribution infrastructure to supply natural gas and electricity to ourcustomers.  In some cases, LDCs alsoprovide billing services and guarantee customer accounts receivable withinvarious markets that we serve.

 

Referencesto “customers” refer to individual accounts served by us.  An individual or business with multipleaccounts will be counted multiple times in our tabulation of customers.  An individual or business may be counted as asingle customer despite having multiple meters in a single location.  A governmental entity or LDC may be countedas a single customer despite representing an aggregation of multiple consumersof natural gas or electricity within a geographic service area under the termsof specific service agreements. Prospective customers that have initiated new service from us are notincluded in our customer portfolio until we have completed all requiredprocessing steps, including credit verification and sharing of appropriateinformation with the respective LDC. Customers that have initiated the processfor termination of their service are included in our customer portfolio untilthe termination has been properly processed and coordinated with the LDC.

 

**CompanyOverview, History and Development**

 

TheCompany was founded and incorporated in the state of Delaware in 1999.  Headquartered in Stamford, Connecticut, weare an independent energy provider of retail natural gas and electric power toresidential and commercial customers in deregulated markets in the U.S. andCanada.  We are one of a number of retailenergy marketers in the growing deregulated market.  We currently serve natural gas andelectricity customers located in 41 market areas across 14 states in the U.S.and in the provinces of Ontario and British Columbia in Canada.

 

Thefollowing map reflects the states in the U.S. and the Canadian provinces wherewe have natural gas and electricity customers as of June 30, 2010.

 

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**Recent Developments**

 

***Equity and Debt Restructuring***

 

Asharp drop in natural gas market prices during the six months ended December 31,2008 resulted in a significant reduction in the available borrowing base underthe Company’s revolving credit facility (the “Revolving Credit Facility”).  The reduced borrowing base strained theCompany’s ability to post letters of credit as collateral with suppliers andhedge providers, caused defaults of certain financial covenants included in theagreement that governed the Revolving Credit Facility, prompted downgrades inthe Company’s ratings from credit rating agencies and ultimately resulted inthe Company obtaining material waivers of, and amendments to, the agreementthat governed the Revolving Credit Facility and the Company’s principalcommodity hedge facility (the “Hedge Facility”). Such amendments had materialdirect impacts on the Company’s liquidity position and operations during fiscalyear 2009 and the first three months of fiscal year 2010, including requiringthat the Company seek a new facility to replace the Revolving Credit Facilityand the Hedge Facility.

 

OnSeptember 22, 2009, the Company completed an equity and debt restructuring,which included various transactions (the “Restructuring”).  The Restructuring included a debt exchangetransaction that was accounted for as a troubled-debt restructuring inaccordance with accounting principles generally accepted in the United States (“U.S.GAAP”) and therefore did not result in any gain or loss recorded in theconsolidated statements of operations. The Company also entered into two master supply and hedge agreementswith Sempra Energy Trading LLC (“RBS Sempra”) (the “ISDA Master Agreements” andcollectively, the “Commodity Supply Facility”) to replace the Revolving CreditFacility and Hedge Facility.  Thetransactions consummated in connection with the Restructuring had materialimpacts on various asset, liability and stockholders’ equity accounts duringthe quarter ended September 30, 2009, as summarized in the following table.

 

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| ** **                                                               | ** ** | **Balance at  June 30,  2009** | ** ** | **Restructuring  Transactions,  Net** | ** ** | **Other  Operating  Activity, Net** | ** ** | **Balance at  September 30,  2009** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **(in thousands)**                  | ** ** |
| **Selected asset accounts:**                                             | ** ** | ** **                               | ** ** | ** **                            | ** ** | ** **                               | ** ** | ** **                                    | ** ** |
| Cash and cash equivalents                                                |       | $                                        | 23,266     |                                  | $          | (2,375                                   | )          | $                                             | (17,385    | ) | $ | 3,506 |   |
| Restricted cash                                                          |       | 75,368                                   |       | (75,000                               | )          | 1,133                                    |       | 1,501                                         |       |
| Accounts receivable — RBS Sempra                                    |       | —                                   |       | 17,948                                |       | (6,072                                   | )          | 11,876                                        |       |
| Fixed Rate Notes Escrow Account                                          |       | —                                   |       | 8,977                                 |       | —                                   |       | 8,977                                         |       |
| Deferred debt issue costs                                                |       | 4,475                                    |       | 15,083                                |       | (3,546                                   | )          | 16,012                                        |       |
| Net impact on selected asset accounts                                    |       | $                                        | 103,109    |                                  | $          | (35,367                                  | )          | $                                             | (25,870    | ) | $ | 41,872 |   |
|                                                                     |       |                                     |       |                                  |       |                                     |       |                                          |       |
| **Selected Liability and  stockholders’ equity accounts:**          |       |                                     |       |                                  |       |                                     |       |                                          |       |
| Liabilities:                                                             |       |                                     |       |                                  |       |                                     |       |                                          |       |
| Bridge Financing Loans payable                                           |       | $                                        | 5,400      |                                  | $          | (5,400                                   | )          | $                                             | —     |   | $ | — |   |
| Denham Credit Facility                                                   |       | 12,000                                   |       | (12,000                               | )          | —                                   |       | —                                        |       |
| Long-term debt:                                                          |       |                                     |       |                                  |       |                                     |       |                                          |       |
| Fixed Rate Notes due 2014                                                |       | —                                   |       | 49,951                                |       | 79                                       |       | 50,030                                        |       |
| Floating Rate Notes due 2011                                             |       | 163,476                                  |       | (158,787                              | )          | 1,665                                    |       | 6,354                                         |       |
| Net impact on selected liability accounts                                |       | 180,876                                  |       | (126,236                              | )          | 1,744                                    |       | 56,384                                        |       |
|                                                                     |       |                                     |       |                                  |       |                                     |       |                                          |       |
| Redeemable convertible preferred stock                                   |       | 54,632                                   |       | (54,632                               | )          | —                                   |       | —                                        |       |
|                                                                     |       |                                     |       |                                  |       |                                     |       |                                          |       |
| Stockholders’ equity:                                               |       |                                     |       |                                  |       |                                     |       |                                          |       |
| Common stock                                                             |       | 47                                       |       | 496                                   |       | —                                   |       | 543                                           |       |
| Additional paid in capital                                               |       | 18,275                                   |       | 119,080                               |       | (117                                     | )          | 137,238                                       |       |
| Accumulated deficit                                                      |       | (90,469                                  | )          | 25,925                                |       | (10,236                                  | )          | (74,780                                       | )          |
| Net impact on selected stockholders’ equity  accounts               |       | (72,147                                  | )          | 145,501                               |       | (10,353                                  | )          | 63,001                                        |       |
| Net impact on selected liability and stockholders’  equity accounts |       | $                                        | 163,361    |                                  | $          | (35,367                                  | )          | $                                             | (8,609     | ) | $ | 119,385 |   |

 

Materialimpacts of the Restructuring are further described in the “Balance SheetOverview” section within Item 7 of this Annual Report.  As a result of the Restructuring, wesignificantly decreased our outstanding debt obligations, which resulted inlower debt service requirements for fiscal year 2010 and future years.  In addition, the Revolving Credit Facilityand Hedge Facility were replaced by the Commodity Supply Facility, whichprovides us with a stable source of liquidity through August 2012 with aninvestment grade counterparty.  Overall,the transactions consummated in the Restructuring improved our liquidityposition, improved our financial and operational flexibility and allowed us tocompete more effectively within the markets that we serve.

 

***Ohio SSO Program***

 

InApril 2010, we began delivering natural gas to an LDC in Ohio as part of a newStandard Service Offer program (the “SSO Program”).  Under the SSO Program, for the twelve-monthperiod from April 1, 2010 through March 31, 2011, we will receive aNYMEX-referenced price plus a price adjustment for natural gas delivered by theLDC to its customers who are eligible to participate in the SSO Program.  We expect that our gross profit per MMBtusold to the LDC will be lower under the SSO Program than the gross profit thatwe normally experience from our direct retail energy customers.  From April 1 through June 30, 2010, wedelivered approximately 1.6 million MMBtus of natural gas to the LDC under theSSO Program.  As of June 30, 2010, basedupon estimates received directly from the LDC, we expect that the customersassigned to us as a participant in the SSO Program will consume approximately9.7 million MMBtus of natural gas annually, the majority of which will occurduring the upcoming winter heating season.

 

**InformationRegarding Our Business Segments**

 

Salesof natural gas and electricity are summarized in the following table.  The sales amounts in the table are intendedto provide an indication of operational growth within the segments, and are notnecessarily indicative of similar growth in gross profit or net income.  Refer to “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” located elsewhere inthis Annual Report for commentary regarding gross profit and other componentsof net income.

 

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| ** **  | ** ** | **Fiscal Year Ended June 30,** | ** **  |
|-------------|------------|----------------------------------------------------|-------------|
| ** **  | ** ** | **2010**                                           | ** **  | **2009** | ** ** | **2008** | ** ** |
| ** **  | ** ** | **Sales**                                          | ** **  | **% of  Total** | ** ** | **Sales** | ** ** | **% of  Total** | ** ** | **Sales** | ** ** | **% of  Total** | ** ** |
| ** **  | ** ** | **($ in thousands)**                     | ** **  |
|        |       |                                               |        |   |   |   |   |   |   |   |   |   |   |
| Natural gas | ** ** | **$**                                              | **457,909** | ** ** | **82** |   | $ | 670,584 |   | 85 |   | $ | 669,522 |   | 89 |   |
| Electricity | ** ** | **103,297**                                        | ** **  | **18** |   | 119,196 |   | 15 |   | 82,761 |   | 11 |   |
| Total sales | ** ** | **$**                                              | **561,206** | ** ** | **100** |   | $ | 789,780 |   | 100 |   | $ | 752,283 |   | 100 |   |

 

Additionalinformation regarding our business segments can be found in Note 23 of theaudited consolidated financial statements, included in Item 8 of this AnnualReport.

 

***Our Products***

 

Wesell natural gas and electricity at variable or market-based prices that, inmost cases, change monthly or at fixed prices for a forward term that generallydoes not exceed two years.  In the caseof variable sales contracts as well as most mid-market commercial sales, wepurchase natural gas or electricity at the time of sale.  In the case of fixed price retail customers,we purchase natural gas and electricity in advance of sales.  Costs are marked up with a reasonable profitmargin.

 

Forfixed price sales contracts, the cost of the commodity is hedged in the forwardmarkets with financial swaps and physical forward contracts that settlemonthly.  Physical natural gas andelectricity is then purchased at the time such swap contracts settle.  We regularly calculate the amount of thecommodity required to meet our expected customer deliveries and balance thisagainst the quantity hedged or purchased for such customers.  Differences between expected customerdeliveries and commodity purchases are managed by adjusting natural gasdeliveries from storage and buying any shortfall or selling any excess in themarket.

 

Wemarket variations of two basic products:

 

·                     **Fixedprice contracts*—***Generally with****terms of up to two years for natural gas andelectricity, fixed rate products provide consumers with price protectionagainst fluctuations in natural gas and electricity prices.  In marketing this product, we do not promisesavings as a consumer could pay more if prices offered by a local utility orother competitor, which are based on variable market conditions, fall duringthe term of the fixed rate contract.

 

We have a risk management policy that is intended to reduce ourfinancial exposure related to changes in the price of natural gas andelectricity.  Under this policy, ourobjective is to hedge a minimum of 100% of the anticipated natural gas andelectricity commodity purchases required to meet expected customer demand forall accounts served under fixed price contracts.  Any difference between actual consumption andour purchased commodity volume results in pricing risk for the month.

 

·                     **Variableprice contracts*—***Variable price products generally are priced competitivelywith the price offered by the region’s incumbent utility and/or other localcompetitors (the “price to compare” or “PTC”). Our variable rate product is similar to utility variable ratepricing.  By using alternative supplyarrangements, we are sometimes able to supply customers with the commodity at aprice lower than the utility’s tariff pricing due to the utility’s prior periodcost recovery charges, fixed term transportation costs and/or hedgingstrategy.  We do not guarantee tocustomers that our price will be below the PTC.

 

We generally do not hedge to protect against price volatilityassociated with deliveries under variable rate natural gas and electricitycontracts because our variable price is set ahead of the month of commodityflow, which ensures a direct correlation between our cost for commoditydelivered and the price charged to the customer.  However, we do hedge natural gas inventorypurchased during the summer to ensure that the value of storage inventory iscorrelated to the market price of natural gas when it is withdrawn during thewinter months.  Any difference betweenactual consumption and our purchased commodity volume results in pricing riskfor the month.

 

Thenatural gas and electricity sold is metered and delivered to customers byLDCs.  Except in our Georgia natural gasand Texas electricity markets and for certain of our commercial customers, LDCsgenerally provide billing and collection services on our behalf for residentialand small commercial customers.  In thecase of our Georgia and Texas retail markets, we bill and collect directly fromcustomers the price of delivered commodity plus the charges associated with thelocal utility’s distribution costs, the latter of which is remitted to suchutility.

 

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***Our Customer Portfolio***

 

Ourcustomer base consists of residential and small and mid-market commercialcustomers.  We have limited exposure tohigh concentrations of sales volumes to individual customers.  From April 1 through June 30, 2010, wedelivered approximately 1.6 million MMBtus of natural gas to the LDC under theSSO Program, which represented approximately 3.6% of our total natural gassales volume for fiscal year 2010.  Forfiscal years 2009 and 2008, no single natural gas customer accounted for morethan 3% of our total natural gas sales volume.

 

Thefollowing graph illustrates changes in our average RCE count for fiscal years2006 through 2010.

 

 

Thereduction in average natural gas RCEs during fiscal year 2010 resultedprimarily from liquidity-related limitations placed on our ability to obtainnew customers and to retain existing customers and from high credit-relatedattrition in certain of our markets. Volatility in natural gas prices negatively impacted our liquidityposition and resulted in amendments to our Revolving Credit Facility, whichplaced formal constraints on the term and type of contracts that we could offerto new customers and to existing customers who informed us of their intent toterminate their contract before its termination date.  In order to conserve cash, we also reduceddirect mail marketing and advertising expenditures and scaled back our use ofcertain sales channels during fiscal year 2009 and the first quarter of fiscalyear 2010, which had a negative impact on brand awareness and our ability toacquire new customers.

 

Deterioratingeconomic conditions during fiscal year 2009 resulted in credit-relatedattrition that was higher than historical levels.  Refer to “Retaining and Winning BackCustomers” below for additional commentary regarding customer attrition.

 

Duringfiscal year 2010, we experienced a more stable price environment and lowercustomer defaults as compared with the prior fiscal year.  In addition, under the provisions of theCommodity Supply Facility, the constraints on our marketing and hedgingactivities have been removed, and we are able to offer a wider variety ofnatural gas and electricity products to current and potential customers usingour traditional marketing channels.  As aresult, during the second and third quarters of fiscal year 2010, weexperienced in-contract attrition in most of our natural gas and electricitymarkets that was lower than that experienced during fiscal year 2009 and thefirst quarter of fiscal year 2010, and we experienced customer growth incertain of our electricity markets.

 

**AcquiringNew Customers**

 

Asof June 30, 2010, most of our current customers have been acquired organicallythrough an integrated marketing approach that consists of multiple combinationsof direct marketing activities, such as door-to-door marketing, success-basedand hourly telemarketing and direct mailings, and indirect marketingactivities, which include traditional and online media, public

 

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relationsand local event participation.  We arefocused on growing our customer base while controlling customer acquisitioncosts.  Our objective has been tomaintain customer acquisition costs below 12 months of gross profit resultingin a pay back period of less than one year. As a result of our return to normal marketing activities, our totalexpenditures for acquiring customers, which includes amounts capitalized ascustomer acquisition costs and certain other marketing and advertisingexpenses, increased approximately 50% during fiscal year 2010, as compared withthe prior fiscal year.  Our cost toacquire customers approximated $100 per RCE for fiscal year 2010, which wasconsistent with the amount spent per RCE in the prior fiscal year.

 

Inorder to conserve cash, we significantly reduced direct mail marketing,advertising and overall marketing expenditures during fiscal year 2009, ascompared to the prior fiscal year.  Wealso scaled back our use of certain sales channels, which had a negative impacton brand awareness and new customer acquisitions during fiscal year 2009.  During fiscal year 2010, as a result of theRestructuring, we are offering a wider variety of natural gas and electricityproducts to current and potential customers using our traditional marketingchannels.

 

Inaddition to organic growth, we have historically followed a disciplinedacquisition strategy, acquiring only businesses that meet certain criteria,including the following:

·                 the acquired operations must be consistentwith our business objectives to build a profitable retail business;

·                 the customers of the acquired company musthave been acquired by such company in a manner consistent with our marketingprinciples and values and in accordance with applicable laws and regulations;

·                 the operations of the acquired company can beintegrated with existing internal systems and processes;

·                 the acquired customers are located in marketsthat facilitate risk management through transparent pricing and liquidinstruments; and

·                 the acquisition can be supported by ourfinancing capabilities.

 

Someof the companies we acquired were located in markets not previously served byus and therefore, provided us with new strategic marketing opportunities.  We intend to continue this strategy whenevaluating new acquisition opportunities. We completed 10 separate acquisitions since our inception in 1999,including the following acquisitions since 2005:

 
| **Acquisition Date** | ** ** | **Company / Business Acquired**            | ** ** | **Number and********Type of RCEs  Acquired** | ** ** |
|---------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------|------------|
|                      |       |                                                      |       |                                                        |       |
| November 2005             |       | Castle  Power LLC                                         |       | 53,000  natural gas                                         |       |
| August 2006               |       | Shell  Energy Services Company L.L.C. (“SESCo”) |       | 315,000  natural gas                                        |       |
| May 2007                  |       | Vantage  Power Services L.P.                              |       | 12,000  electricity                                         |       |
| January 2008              |       | GasKey  division of PS Energy Group, Inc.                 |       | 60,000  natural gas                                         |       |
| October 2008              |       | Catalyst  Natural Gas LLC                                 |       | 38,000  natural gas                                         |       |

 

OnAugust 1, 2006, we acquired substantially all of the assets of SESCo, a whollyowned subsidiary of Shell Oil Company. As of August 1, 2006, SESCo supplied natural gas to approximately315,000 RCEs in the deregulated markets of Georgia and Ohio.  In addition to expanding our relationshipswith customers in two of our existing LDC markets in Ohio, the SESCoacquisition added Georgia to the list of states in which we operate.  Georgia has been our largest natural gasmarket since the acquisition of SESCo.

 

**CustomerRetention and Attrition**

 

Toretain existing customers, we rely on a team of highly trained internal andexternal customer care representatives. Customers requesting cancellation of service are provided information onthe volatility of commodity rates and encouraged to retain the benefits oflong-term rate protection, if appropriate. If we receive notification from an LDC that a customer has cancelled orswitched to another supplier, attempts to communicate with those customers aremade through both mail and phone, encouraging the customer to reconsider his orher decision, reminding the customer of early-termination fees he or she mayincur and, in some cases, offering a new rate plan.

 

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Customerrenewal and in-contract attrition percentages are summarized in the followingtables.

 
| ** **                           | ** ** | **Activity for Fiscal Year Ended  June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                 |       |                                                                  |       |   |   |   |   |
| Customer renewal percentage (1)      |       | 93                                                                    | %          | 84 | % | 85 | % |
| In-contract attrition percentage (2) |       | 26                                                                    | %          | 34 | % | 20 | % |

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(1)   At the end of each customer contract term, customer contracts inmost of our markets are renewed upon notification by the marketers unless thecustomer indicates otherwise.  Customerrenewal percentages in the table represent the percentage of customers whoreceived such notification that ultimately continued their relationship withus.

 

(2)   In-contract customer attrition percentage is defined as: (a) thepercentage of loss of fixed rate customers after they have begun to receivenatural gas or electricity from us but before their contract term officiallyexpires; and (b) the percentage of loss of any variable rate customers,whose contracts generally do not have expiration dates.

 

Attritiondata is calculated based upon actual customer level data.  For analytical purposes, we assume that oneRCE represents a natural gas customer with a standard consumption of 100 MMBtusper year, or an electricity customer with a standard consumption of 10 MWhr peryear.  However, each customer does notactually consume 100 MMBtu of natural gas or 10 MWhr of electricity.  For example, one of our mid-market or largecommercial customers may consume the equivalent of several hundred or eventhousands of RCEs.  Therefore, anyreduction or increase in RCEs in any of our markets does not necessarilycorrelate directly with net customer attrition.

 

Fiscalyear 2009 was an unusually challenging year for us with respect to customerretention and attrition.  Our marketingactivities and hedging capabilities were constrained under the Revolving CreditFacility and Hedge Facility, which severely limited our ability to offerdesirable product options to existing or new customers.  For instance, our ability to offer long-termfixed rate products to new and renewal customers was severely limited.  This contributed to attrition generally, andparticularly for various commercial customers, each of which represented alarge number of RCEs per customer. Organic customer growth was also well below our historical levels due tothese constraints.

 

Difficulteconomic conditions in many of our markets during fiscal year 2009 and the firstthree months of fiscal year 2010 resulted in credit-related attrition that washigher than historical levels. Credit-related attrition was particularly high in our Georgia naturalgas market, partially due to expected credit quality issues within the portfolioof customers that we acquired from Catalyst Natural Gas LLC (“Catalyst”) inOctober 2008.

 

Volatilecommodity prices during fiscal year 2009 caused many consumers of natural gasand electricity to migrate to market rates that were lower than their currentrates.  Since we were limited in ourability to offer new competitive rates to customers who indicated theirintention to terminate their contract, many of our customers left us in favorof other retail marketers or their local utility.

 

Duringfiscal year 2010, we and our customers experienced a more stable priceenvironment and lower customer defaults as compared with the prior year.  In addition, under the provisions of theCommodity Supply Facility, the constraints on our marketing and hedgingactivities have been removed, and we are able to offer a wider variety ofnatural gas and electricity products to current and potential customers usingour traditional marketing channels.  As aresult, during fiscal year 2010, we experienced lower in-contract attrition inmost of our natural gas and electricity markets and customer growth in certainof our electricity markets.

 

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ourability to offer long-term fixed rate products to customers was severelylimited.  Additionally, when customersinformed us of their intent to terminate their contract before its terminationdate, our options for offering new contracts were limited, which contributed toattrition.

 

**CustomerContract Concentrations**

 

Weprovide customers with a choice of natural gas and electricity products withalternative price structures that are designed to manage the risks of energyprice volatility.  The two basicalternative price structures are variable market-based pricing and fixed priceforward contracts.  Pricing and terms forthese products are developed so that at any given time, potential customers canchoose the product to meet their household or business needs.   We attempt to be flexible and to respondquickly to market conditions to ensure that our products match consumerinterests.  Unlike competitors offeringone product choice at a time, we simultaneously provide multiple productofferings.  We also attempt to keep ourproduct offerings simple in order to facilitate marketing to residential andsmall commercial customers.

 

Asof June 30, 2010, 2009 and 2008, approximately 42%, 45% and 60%, respectively,of our natural gas customer portfolio had fixed rate contracts while theremaining 58%, 55% and 40%, respectively, had variable rate contracts.  We have a risk management policy that isintended to reduce our financial exposure related to changes in the price ofnatural gas and electricity.  Under thispolicy, our objective is to hedge a minimum of 100% of the anticipated naturalgas commodity purchases required to meet expected customer demand for allaccounts served under fixed price contracts. We also have a natural gas hedging facility that limits our exposure tomark-to-market margin payments.  As of June30, 2010, contracts with our fixed price natural gas customers have an averageremaining life of approximately 5 months.

 

Asof June 30, 2010, 2009 and 2008, approximately 70%, 36% and 36%, respectively,of our electricity customer portfolio had fixed rate contracts while theremaining 30%, 64% and 64%, respectively, had variable rate contracts.  Although our objective is to economically hedge aminimum of 100% of anticipated electricity commodity purchases required to meetexpected customer demand under fixed price contracts, there are certainancillary and capacity costs that we are unable to hedge due to the term andthe size of our electricity portfolio.   In addition, since we cannot fully anticipatehourly spikes in demand for electricity during peak summer months, we may beunable to fully hedge commodity purchases necessary to meet such spikes indemand.  Historically, our inability toeconomically hedge certain electricity commodity purchases and related costshas not had a material impact on our results of operations.  As of June 30, 2010, contracts withour fixed price electricity customers have an average remaining life ofapproximately 6 months.

 

**GeographicMarket Concentrations**

 

Webelieve that our diversified geographical coverage provides several benefits tous, including flexibility in product offerings and marketing campaigns, a broaddemographic mix and diversified credit and regulatory exposure.  Our multi-state approach allows us to:

·                  benefit from a diverse geographic stream ofsales;

·                  lower the delivery risk associated with dailybalancing gas markets;

·                  lower supply price risk and/or the risk ofancillary services events in a particular electricity market;

·                  achieve scalability from knowledge of multipleLDC programs and procedures;

·                  lower the risk of material impact from aregulatory change in a single jurisdiction;

·                  lower the risk of extreme regional weatherpatterns;

·                  lower the risk of material impact from regionaleconomic downturns;

·                  improve inventory management opportunitiesacross a diverse natural gas transportation and storage infrastructure; and

·                  capitalize on our regional supply and pricingknowledge.

 

RCEsby geographic area, excluding the SSO Program, are summarized in the followingtable.

 

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| ** **                                                | ** ** | **RCEs at June 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                | ** ** | **2010**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                | ** ** | **No.**                             | ** ** | **%********of  Total** | ** ** | **No.** | ** ** | **%********of  Total** | ** ** | **No.** | ** ** | **%********of  Total** | ** ** |
| ** **                                                | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Southern U.S.**(1):                                     |       |                                |       |   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Natural gas                                               |       | 150,000                             |       |   |   | 197,000 | ** ** | ** ** |   | 241,000 | ** ** | ** ** | ** ** |
| Electricity                                               |       | 27,000                              |       |   |   | 25,000 | ** ** | ** ** |   | 25,000 | ** ** | ** ** | ** ** |
| ** **                                                |       | 177,000                             |       | 29 | % | 222,000 |   | 40 | % | 266,000 |   | 38 | % |
| **Northeastern U.S., Mid-Atlantic  U.S. and Canada** (2): |       |                                |       |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Natural gas                                               |       | 144,000                             |       |   |   | 138,000 |   |   |   | 156,000 | ** ** | ** ** | ** ** |
| Electricity                                               |       | 146,000                             |       |   |   | 50,000 |   |   |   | 73,000 | ** ** | ** ** | ** ** |
|                                                      |       | 290,000                             |       | 48 | % | 188,000 |   | 33 | % | 229,000 |   | 33 | % |
| **Midwestern U.S.**(3):                                   |       |                                |       |   |   |   |   |   | ** ** | ** ** | *** *** | *** *** | *** *** |
| Natural gas                                               |       | 139,000                             |       |   |   | 152,000 |   |   |   | 205,000 | ** ** | ** ** | ** ** |
| Electricity                                               |       | —                              |       |   |   | — |   |   |   | — | ** ** | ** ** | ** ** |
|                                                      |       | 139,000                             |       | 23 | % | 152,000 |   | 27 | % | 205,000 |   | 29 | % |
| **Total RCEs (4):**                                       |       |                                |       |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Natural gas                                               |       | 433,000                             |       |   |   | 487,000 |   |   |   | 602,000 | ** ** | ** ** | ** ** |
| Electricity                                               |       | 173,000                             |       |   |   | 75,000 |   |   |   | 98,000 | ** ** | ** ** | ** ** |
| Total                                                     |       | 606,000                             |       | 100 | % | 562,000 |   | 100 | % | 700,000 |   | 100 | % |

 

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(1)          Includes markets in Georgia, Texas and Florida.

(2)          Includes markets in New York, New Jersey,Connecticut, Massachusetts, Pennsylvania, Maryland, Ontario and BritishColumbia.

(3)          Includes markets in Ohio, Michigan, Indiana, Illinoisand Kentucky.

(4)          Excludes RCEs to be served in connection with theSSO Program in Ohio, pursuant to a one-year contract that expires March 31,2011.

 

Ourbusiness platform is partly based on providing long-term, fixed rate priceprotection in contrast to variable rates offered by LDCs against which wecompete in the markets that we serve. For the majority of fiscal year 2009, our financial and liquidityrestrictions limited new and renewed contract terms to 12 months or less.  Therefore, we were unable to fulfill consumerdemand for longer-term products, losing growth and renewal opportunity to LDCsand competitors in many of our markets.

 

***Southern U.S. markets —***Total RCEs inour southern markets decreased 20% and 17% during fiscal years 2010 and 2009,respectively, mainly due to a decrease in our customer base in the Georgianatural gas market.  In addition to theimpact of liquidity constraints in Georgia, customer account terminations werealso unusually high due to bad debt experience attributed to economicconditions, and to more stringent credit standards initiated during the yearfor new and renewable customer accounts. Liquidity and contract term limitations also impacted growth andrenewals in our Texas electricity market.

 

***Northeastern U.S., Mid-Atlantic U.S. andCanadian markets —*****Total RCEswithin this region increased 54% during fiscal year 2010, primarily due tostrong customer growth in various electricity markets.  During fiscal year 2010, we focused on growthin our existing guaranteed electricity markets in order to improve the seasonalcash flow associated with the electricity business segment and reduce risksassociated with commodity and geographic concentrations.  In addition, actual**e**lectricityRCEs at June 30, 2010 include approximately 56,000 RCEs added as a result ofour expansion into a new electricity market in Pennsylvania.

 

InApril 2010, we obtained our electricity retail supplier license in the State ofMaryland and began actively marketing in July to electricity customers within aMaryland service territory. Additionally, recently approved regulations in Maryland will requirenatural gas and electricity utilities to either guarantee supplier receivablesor improve the way customer payments are allocated to suppliers.  Within one of the two natural gas markets inMaryland where we currently operate, the LDC began guaranteeing the receivablesof retail suppliers on July 15, 2010.  Weanticipate the other LDC market in Maryland will begin guaranteeing receivablessometime during fiscal year 2011.

 

Recentlegislation in Massachusetts will require electricity LDCs to guarantee theaccounts receivable of retail suppliers, although the time frame for thisimplementation is currently unknown.  Newinitiatives that will increase the attractiveness of certain other northeasternelectricity and natural gas markets also began to take effect early in fiscalyear 2011.

 

***Midwestern U.S. markets —***Total RCEs inour Midwestern region, excluding RCEs expected to be served in connection withthe SSO Program, decreased 9% and 26% during fiscal years 2010 and 2009,respectively, due primarily to competitive pressure and budgetary constraintsplaced on our sales and marketing team. The contract term limitations placed on us prior to the Restructuringalso significantly impacted growth opportunities in the Michigan market.

 

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InApril 2010, we began delivering natural gas to an LDC in Ohio as a participantin the SSO Program.  Under the SSOProgram, we receive a NYMEX-referenced wholesale price plus a retail priceadjustment for natural gas delivered by the LDC to its customers who remaineligible to participate in the SSO Program. As of June 30, 2010, based upon estimates received directly from theLDC, we expect that the customers assigned to us as a participant in the SSOProgram will consume approximately 9.7 million MMBtus of natural gas annually.

 

***Potential market growth opportunities —*** For fiscalyear 2011, we will continue to explore expansion into LDC markets that are opento competition and appear to provide attractive growth potential.  The decision to enter into new LDCterritories will continue to be governed by several factors, including:

 

·               compatibility with our existing operatingsystems and supply base;

·               attractiveness of LDC program rules, such asbilling options and guarantees of customer accounts receivable;

·               competitive landscape;

·               mass market consumption profiles;

·               regulatory climate;

·               market location and size; and

·               our ability to provide value to customers.

 

**Guaranteedand Non-Guaranteed Market Concentrations**

 

Weare exposed to direct credit risk associated with customer accounts receivablein eleven of the markets that we serve, where such receivables are notguaranteed by LDCs.  For fiscal years2010, 2009 and 2008, 51%, 55% and 56%, respectively, of our total sales ofnatural gas and electricity were within markets where LDCs do not guaranteecustomer accounts receivable.  We referto these markets as “non-guaranteed” markets. We maintain an allowance for doubtful accounts, which represents ourestimate of potential credit losses associated with accounts receivables fromcustomers within non-guaranteed markets. We record a provision for doubtful accounts based on historical lossexperience within our markets and periodically assess the adequacy of theallowance for doubtful accounts through review of the aging of customeraccounts receivable and general economic conditions in the markets that weserve.

 

Withinthirty of the markets that we serve, we operate under a purchase of receivablesprogram whereby all billed receivables are purchased by the LDC.  We refer to these markets as “guaranteed”markets.  For fiscal years 2010, 2009 and2008, 49%, 45% and 44%, respectively, of our total sales of natural gas andelectricity were within markets where LDCs guarantee customer accountsreceivable at a weighted average discount rate of approximately 1%.  Such discount is the cost of service toguarantee the customer accounts receivable. Within these markets, we are exposed only to the credit risk of the LDC,rather than that of our customers.  Wemonitor the credit ratings of LDCs and the parent companies of LDCs thatguarantee customer accounts receivable. We also periodically review payment history and financial informationfor LDCs to ensure that we identify and respond to any deterioratingtrends.  As of June 30, 2010, all of ourcustomer accounts receivable in LDC-guaranteed markets were from LDCs withinvestment grade credit ratings.

 

Inaddition, in certain markets, we have commercial customers that have asked usto bill them directly for consumption of natural gas and electricity.  For these customers, we bear credit riskassociated with non-payment by the customer.

 

**CommoditySupply and Pricing Risk Management**

 

***Natural Gas Supply***

 

Webuy natural gas in the wholesale market in time and location specific bulkquantities at fixed and indexed prices. Effective September 22, 2009, under the Commodity Supply Facility, webegan purchasing natural gas supply from RBS Sempra, as our exclusive naturalgas supplier.  The Commodity SupplyFacility also requires that we release natural gas transportation and storagecapacity to RBS Sempra and for RBS Sempra to perform certain transportation andstorage nominations.  During fiscal year2010, we released transportation and storage capacity in several markets to RBSSempra according to a mutually acceptable schedule and in a manner intended toensure an effective transition of these functions.  In connection with the Commodity SupplyFacility, we are obligated to reimburse RBS Sempra for various direct costsassociated with transportation and storage capacity released to RBS Sempra bythe Company.

 

Weperiodically adjust our portfolio of supply purchase and sales contracts,storage and transportation capacity based upon continual analysis of ourforecasted load requirements to determine whether it would be more economicalto utilize natural gas from storage or to purchase from the spot market, withconsideration given to transportation costs and availability.  Natural gas is delivered to the LDC city-gateor other specified delivery points where the LDC takes control of the naturalgas and delivers it to individual customers’ locations of use, utilizing itsextensive network of small diameter distribution pipe.

 

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LDCsprovide ancillary services such as billing, meter reading and balancingservices.  Because of this extensivetransportation infrastructure and the services provided, LDC costs typicallymake up a significant portion of the end user’s utility bill.

 

***Electricity Supply***

 

Webuy electricity in the wholesale market in time and location specific block andhourly shaped quantities at fixed and indexed prices. Effective September 22,2009, under the Commodity Supply Facility, we began purchasing electricity fromRBS Sempra, as our exclusive electricity supplier.  The Commodity Supply Facility also requiresthat RBS Sempra perform certain load bidding and scheduling services on ourbehalf with the respective Independent System Operator (ISO) or RegionalTransmission Organization (RTO) to the Company’s customers in each LDC.  In connection with the Commodity SupplyFacility, we are obligated to reimburse RBS Sempra for various direct costsassociated with scheduling and balancing the Company’s supply to the ISOs andRTOs.  ISOs and RTOs provide servicessuch as transmission and load balancing, which comprise a relatively smallportion of the end user’s utility bill in comparison with energy and capacitycosts.

 

***Commodity Pricing Risk Management***

 

Wehave a risk management policy that is intended to reduce our financial exposureto changes in the prices of natural gas and electricity.  Our objective under this policy is toeconomically hedge all anticipated natural gas and electricity commoditypurchases required to meet expected customer demand for all accounts servedunder fixed price contracts.  Wetypically contract for sufficient commodity volume to meet expected customerconsumption assuming normal weather patterns. We may purchase additional commodity volumes for the summer in the caseof electricity and for the winter in the case of natural gas in order toprotect against a potential demand increase in peak seasons.  As a result of the natural swing in customerconsumption related to weather changes, we may have to buy or sell additionalnatural gas or electricity volume, which exposes us to additional pricevolatility.  We utilize various hedgingstrategies in order to mitigate the risk associated with potential volumetricvariability of our monthly deliveries for fixed priced customers.

 

Weutilize the following instruments to offset price risk associated with volumecommitments under fixed and variable price contracts where the price to thecustomer must be established ahead of the index settlement:  (1) for natural gas: NYMEX-referenced gasswaps, basis swaps, physical commodity hedges, physical basis hedges and indexoptions; and (2) for electricity: ISO zone specific swaps, basis swaps,physical commodity hedges, physical basis hedges and index options.  We also utilize carbon dioxide offset creditsand various renewable energy credits in order to meet regulatory requirementsrelated to operating in electricity markets and our commitments from “green”product offers.

 

Referto Item 7A of this Annual Report for additional commentary regarding commodityprice risk management.

 

**Seasonalityof Operations**

 

Themajority of natural gas customer consumption occurs during the months of Novemberthrough March.  By contrast, electricitycustomer consumption peaks during the months of June through September.  Because the natural gas business segmentcomprises such a large component of the Company’s overall business operations,operating results for the second and third fiscal quarters represent the vastmajority of operating results for the Company’s full fiscal year.

 

Cashcollected from natural gas customers peaks in the late winter and early springof each calendar year, while cash collected from electricity customers peaks inthe late summer and early fall.  TheCompany utilizes a considerable amount of cash from operations to meet workingcapital requirements during the months of November through March of each fiscalyear.  In addition, the Company utilizesconsiderable cash to purchase natural gas inventories during the months of Aprilthrough October.

 

Budgetbilling programs can reduce the seasonality of cash receipts, but they can alsocause timing differences between the billing and collection of accountsreceivable and the recording of revenues. The payment terms of LDCs also can cause timing differences between thebilling and collection of accounts receivable and the recording of revenues.

 

Weatherconditions have a significant impact on customer demand and market prices fornatural gas and electricity.  Customerdemand exposes the Company to a high degree of seasonality in sales, cost ofsales, billing and collection of customer accounts receivable, inventoryrequirements and cash flows.

 

Theimpact of rapidly rising or falling commodity prices also varies greatlydepending on the period of time in which they occur during our fiscalyear.  Although commodity price movementscan have material short-term impacts on monthly and

 

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quarterlyoperating results, our economic hedging and contract pricing strategies mayreduce the impact of such trends on operating results for a full fiscal year.

 

**IndustryOverview**

 

***Market Deregulation***

 

Inmarkets that are open to competitive choice of retail energy suppliers, ourprimary competition comes from utility-affiliated retail marketers, small tomid-size independent retail energy companies and default service with theincumbent utility. Competition is based primarily on product offerings, priceand customer service.

 

Increasingour market share depends in part on our ability to convince customers to switchto our service.  The local utilities andtheir affiliates have the advantage of long-standing relationships with theircustomers, and they may have longer operating histories, greater financial andother resources, and greater name recognition in their markets than we do.  In addition, local utilities have beensubject to many years of regulatory oversight and thus have significantexperience regarding the regulators’ policy preferences, as well as a criticaleconomic interest in the outcome of proceedings concerning their revenues andterms and conditions of service.  Theincumbents’ advantages in many markets are intended to be limited, however, byregulatory structures that, for example, prohibit incumbents from offeringnon-standard service and pricing structures, minimize the opportunity for theregulated business to subsidize the unregulated business and limit the abilityof the utilities to solicit customers that have switched.  In Georgia and Texas, however, the market isfully deregulated where the incumbent utilities no longer use a regulatedbenchmark price.

 

Inmany cases, LDCs actively support deregulation and have welcomed the entry ofretail energy marketers.  Regulated LDCsgenerally do not profit from commodity supplied to their customers; rather,their rate of return is based on their infrastructure assets or “rate base.”Accordingly, regulated LDCs charge consumers for commodity on a pass-throughbasis, and do not hedge their forward energy costs.  By relieving LDCs of the need to engage inrisk management, regulations permitting retail competition allows LDCs to focuson their core competency of local distribution, which typically constitutes asignificant portion of most customers’ utility bills.  Many LDCs assume customer bad debt exposuresince this encourages more market entrants and supports continued deregulation.LDCs may recover the bad debt expense as part of their tariff rates.  The interests of retail energy marketers andmost LDCs are thus highly aligned, providing crucial support for continuedderegulation, while increasing penetration of the retail energy marketermodel.  We have successfully forgedstrong relationships with many of the LDCs throughout our service territories.

 

Someof our competitors, including local utilities, have formed alliances and jointventures in order to compete in the restructured retail electricity and naturalgas industries.  Many customers of theselocal utilities may decide to stay with their longtime energy provider if theyhave been satisfied with their service in the past.  Therefore, it may be difficult for us tocompete against local utilities and their affiliates.

 

Ourretail energy sales depend upon our ability to identify and enter profitable,deregulated, retail energy markets, manage the cost of customer acquisitions,retain customers and attract new customers in our existing markets, andintegrate acquired businesses successfully. The principal components of our strategy to compete in existing and newmarkets include:

 

·                offering competitively priced products;

·                maintaining prudent and proven hedging and riskmanagement policies;

·                building and maintaining an excellent commoditysupply team;

·                pursuing organic growth and opportunisticacquisitions;

·                maintaining a low cost operating structure;

·                upholding high customer service standards; and

·                leveraging our investment in informationsystems.

 

***Deregulated Natural Gas Industry***

 

TheNatural Gas Policy Act of 1978 took the first steps toward deregulating thenatural gas market by instituting a scheme for the gradual removal of priceceilings at the wellhead.  In 1985, theFederal Energy Regulatory Commission (“FERC”) issued Order 436, which changedhow interstate pipelines were regulated. Essentially, this order allowed pipelines, on a voluntary basis, tooffer transportation services to customers who requested them on a first-come,first-serve basis.  The movement towardsallowing pipeline customers a choice in the purchase of their natural gas andtransportation arrangements became known as “open access,” and spurred theemergence of natural gas marketers.

 

Whilelarge commercial and industrial consumers have had the option of purchasing thenatural gas commodity separately from natural gas suppliers for many years,state regulators and law makers have moved more slowly in implementing choiceprograms for residential and small-volume commercial customers.

 

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Accordingto the United States Energy Information Agency (“EIA”), as of December 2009,twenty-one states and the District of Columbia have legislation or programs inplace that let residential consumers and other small-volume users purchasenatural gas from someone other than their traditional utility company.  As of December 2009, of the approximately65.3 million residential natural gas customers in the U.S., nearly 35.0 millionhave access to choice programs, with approximately 5.1 million (or 14.7% ofeligible customers) actually purchasing from residential marketers.  State regulators continue to refine andevaluate existing programs in order to promote a competitive marketplace.  The low penetration rate, coupled with thedesire for a competitive marketplace, has created attractive growthopportunities for residential marketers such as us.

 

Asof December 31, 2009, there were approximately 150 marketers licensed to serveresidential natural gas customers, of which 110 were actively serving orenrolling customers.  Marketers competingfor the commercial and residential markets fall into three categories: utilityaffiliates, national marketers and niche marketers.  The commitment of many of these marketers isoften modest, confined to a limited geographic region, and supported by limitedcapital, personnel and operational infrastructure.

 

Wefocus on natural gas markets that are less susceptible to competitive pressureson profit margins and that lend themselves to mass-market techniques.  The number of active competitive retailnatural gas marketers ranges from 2 to 15 in most of the states that we serve,with as many as 60 in New York.  In additionto all local utilities, we consider the main retail competitors within ournatural gas markets to be Georgia Natural Gas, Direct Energy (an affiliate ofUK based Centrica), Gas South, Vectren Source, IDT Energy, Dominion RetailEnergy (a deregulated affiliate of Dominion Resources, Inc.), Just Energy andInterstate Gas Services.

 

***Deregulated Electricity Industry***

 

In1978, Congress passed the Public Utility Regulatory Policies Act, which laidthe groundwork for deregulation and competition by opening wholesale powermarkets to non-utility producers of electricity.  In 1996, FERC Orders 888 and 889 requiredopen and equal access to jurisdictional utilities’ transmission lines for allelectricity producers, thus facilitating the states’ restructuring of theelectric power industry by allowing customers direct access to retail powergeneration.

 

Asa result of federal and state initiatives, the electric power industry inseveral states has changed from a structure characterized by highly regulated,vertically integrated local monopolies, which provide their customers with acomprehensive package of electricity services, to a deregulated structure.  The deregulated structure includesindependent power producers and unregulated owners of electricity generation,competitive providers like us who supply electricity to end-use customers, andutilities that continue to provide transmission or distribution services ascommon carriers.

 

Accordingto the EIA, as of May 2010, 15 states and the District of Columbia operateretail markets in which customers may choose alternative electricitysuppliers.  For electricity, our primaryretail competitors are ConEd Solutions, Direct Energy, StarTex Power, TXUEnergy, Reliant Energy, Champion Energy Services and Dominion Retail Energy.

 

**ForeignOperations**

 

Ourforeign operations are located in Canada. Foreign operations comprised less than 1% of our consolidated totalassets at June 30, 2010 and 2009 and less than 1% of our consolidated sales ofnatural gas and electricity for the fiscal years ended June 30, 2010 and2009.  Management believes that thefinancial and operational risks associated with our Canadian operations areimmaterial.

 

**ManagementTeam and Employees**

 

Themembers of our executive management team have extensive experience in energyrisk management and retail marketing as well as in creating, developing andmanaging businesses and risk on behalf of major internationalcorporations.  The professionalbackgrounds of our executive management team are described in Item 10 of thisAnnual Report.

 

Asof June 30, 2010, we had approximately 203 full-time equivalent employees inthe United States and Canada.  None ofour employees are subject to a collective bargaining agreement, and we believethat our relationship with our employees is good.

 

**EnvironmentalMatters**

 

Wedo not have physical custody or control of the natural gas provided to ourcustomers, or any facilities used to produce or transport natural gas orelectricity.  Although we hold title tonatural gas in interstate pipelines and storage tanks, we believe that thecarriers have the liability risk associated with infrastructure failures thatcould cause environmental issues. Therefore, we do not believe that we have significant exposure to legalclaims or other liabilities associated with

 

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environmentalconcerns.

 

**Where You Can Find More Information**

 

Ourfilings with the SEC are available to the public over the Internet at the SEC’swebsite at www.sec.gov.  You may alsoread and copy any document we file at the SEC’s public reference room locatedat 100 F Street, N.E., Washington, D.C. 20549. Our filings with the SEC are also available under the SEC Filingssection of our website, www.mxholdings.com, as soon as reasonably practicableafter we electronically file such reports with the SEC.  The information contained on this Internetsite is not incorporated by reference in this Annual Report.  You may also request a copy of these filings,at no cost, by writing to us at our corporate headquarters: MXenergy HoldingsInc., 595 Summer Street, Suite 300, Stamford, Connecticut 06901, Attention:Chief Financial Officer, or by calling us at (203) 356-1318.

 

Thewebsite at www.mxholdings.com contains information concerning Holdings and itssubsidiaries.  This website is separatefrom our consumer website, www.mxenergy.com. The information contained on our website and those of our subsidiariesis not incorporated by reference in this Annual Report.

 

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**ITEM1A.   RISK FACTORS**

 

Anyof the following risks could have an adverse effect on our business, financialcondition or results of operations. Additional risks or uncertainties not currently known to us may alsoarise in the future that could have an adverse effect on our business,financial condition or results of operations.

 

**Risks Related to Our Business**

 

**Our riskmanagement policies and hedging procedures may not mitigate risk as planned,and we may fail to fully or effectively hedge our commodity supply and pricerisk exposure against changes in consumption volumes or market rates.**

 

Toprovide energy to our customers, we purchase the relevant commodity in thewholesale energy markets, which are often highly volatile.  It is our policy to match estimatedconsumption by our customers by purchasing offsetting volumes of natural gasand electricity.  To reduce our financialexposure related to commodity price fluctuations and changes in consumptionvolumes, we routinely enter into contracts to hedge our fixed price salecommitments, delivery requirements and inventory of natural gas, as well asfixed price sale commitments and line loss of electricity.

 

Wehave contractual obligations to many of our customers to provide fullrequirements service and as a result, our hedging procedures require constantmonitoring and adjustment. Failure to continue to use valid assumptions maylead to inappropriate hedging positions.  In addition, there are a number of factorsthat are beyond our control, such as risk of loss from counterparties’nonperformance, volumetric risks related to customer demand and seasonalfluctuations.  Although we purchaseanticipatory hedges that represent volume we expect to sell to residential andsmall commercial customers for up to one month of projected marketing, we areexposed to the risk of a shortfall in marketing that could result in ourpurchases exceeding our supply commitments to those customers.  We cannot fully protect ourselves againstthese factors and if our risk management policies are inadequate, this may havea detrimental effect on our business.

 

**Actualcustomer attrition may exceed or be below expected attrition, which couldresult in a cost to cover previously purchased fixed price hedges and physicalcommodity supply or in incremental cost to source additional commodity supply.**

 

Althoughour fixed price contracts with residential customers generally have terms of upto two years, those customers may terminate their contracts at any time for atermination fee that, in most cases, is relatively modest and does not bear anyrelation to our costs or lost profit with respect to the remainder of thecontract.  Most of our small andmid-market commercial customers cannot terminate their fixed price contractswithout triggering a damages provision designed to cover costs related to thetermination of those contracts.  Forlarger commercial customers, we utilize various means to ensure that we recoverour costs, including legal remedies if appropriate. We depend on our hedgingstrategies to cover the costs related to terminations by residential and smallcommercial customers.  To hedgeeffectively against terminations, we must, at the inception of the contracts,attempt to accurately forecast the number of residential and small commercialcustomers that will terminate their contracts prior to the end of their term.  If we experience a number of cancellationsgreater than originally forecasted or if we are not able to replace terminatingcustomers with new customers, our financial results may be negatively impacted.  Conversely, if forecasted attrition is higherthan actual realized attrition, we are at risk for having to source additionalhedges or supply at potentially higher market prices where no price increasecan be passed on to customers through the duration of their contract terms.

 

**Most of ourfinancial swap agreements are settled against published index prices that couldcease to be reliable or could become unavailable.**

 

Wehedge our forward natural gas exposures through a combination of physicalsupply purchases and financial swap agreements.  Financial swap agreements may be settledagainst monthly New York Mercantile Exchange (“NYMEX”) settlement prices oragainst index prices published by various industry publications.  NYMEX settlement prices could be affected by supplyand demand factors at the Henry Hub delivery point of the contract that are notpresent elsewhere in the country.  Accordingly, the NYMEX settlement prices maycease to accurately reflect the market price of natural gas.  Likewise, index prices for market areas inwhich our customers are located, and which are contained in daily and monthlyindustry publications, are published based on private polling of industryparticipants and therefore may be distorted, deliberately or unintentionally,thereby ceasing to be an accurate gauge of market pricing in those areas.

 

Inthe event either NYMEX settlement prices or published index prices were tobecome unavailable or cease to be reliable, we and our counterparties couldseek to find a replacement price that would more accurately or reliably reflectthe market prices that we are hedging.  However, there is no certainty that suchefforts would be successful.

 

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**Theaccounting method utilized for our hedging activities results in volatility inour quarterly and annual financial results.**

 

Weengage in risk management activities related to our natural gas and electricitypurchases in order to economically hedge our exposure to commodity price risk.  Through the use of financial derivative andphysical contracts, we attempt to balance our physical and financial purchasesand sales commitments.  We have notdesignated these derivative instruments as hedges for accounting purposes.  Therefore, changes in the fair value of theseinstruments are recognized immediately in earnings.  As a result of this accounting treatment,changes in the forward prices of natural gas and electricity cause volatilityin our quarterly and annual earnings, which we are unable to fully estimate orpredict.

 

**We may nothave sufficient liquidity or credit capacity to hedge market risks, to continueto grow our business, or to operate effectively.**

 

Certainof our LDC, transportation and storage agreements require us to maintainrestricted cash balances or letters of credit as collateral for the performancerisk associated with the future delivery of natural gas.  These collateral requirements may increase asour customer base grows or as a result of movements in the market prices ofcommodity.  The effectiveness of ouroperations and future growth depends in part on the amount of cash and lettersof credit available to enter into or maintain these contracts.  Such liquidity requirements may be greaterthan we anticipate or are able to meet.

 

**Despite ourefforts to hedge risk and accurately forecast demand, our financial results aresusceptible to changing weather conditions and commodity price fluctuations andtherefore will fluctuate on a seasonal and quarterly basis.**

 

Ouroverall operating results fluctuate substantially on a seasonal basis, and thepattern of this fluctuation may change depending on: (1) the geographic mix ofour customer base; (2) the terms of any contract to which we become a party;(3) weather conditions, which directly influence the demand for electricity andnatural gas and affect the prices of energy commodities; and (4) variability inmarket prices for natural gas and electricity.

 

Generally,demand for electricity peaks in the summer with a secondary peak during thewinter.  Demand for natural gas peaks inthe winter.  Recent growth in naturalgas-fired electric generation has introduced a secondary peak for natural gasin the summer.  Typically, when wintersare warmer than expected and summers are cooler than expected, demand forenergy is lower, resulting in less natural gas and electricity consumption thanforecasted.  Likewise, when winters arecolder or summers are warmer than expected, consumption may be greater than wehave hedged and, in the case of natural gas, may be greater than we are able tomeet with storage or swing supply. Depending on prevailing market prices forelectricity and gas, these and other unexpected conditions may reduce our salesor increase our costs and negatively impact our results of operations.  We may experience lower consumption volumes,and therefore, lower sales. We may experience losses from the purchase ofadditional volumes at higher prices or the sale of excess volumes at pricesbelow our acquisition cost.  Our failureto anticipate changing weather-related demands or to effectively manage oursupply in response to changing demands could negatively impact our financialresults.

 

Theimpact of rapidly rising or falling commodity prices also varies greatlydepending on the period of time that they occur within our fiscal year.  Although operating results for a full fiscalyear may not be impacted materially by such trends due to our commodity hedgingand contract pricing strategies, they can have material short-term impacts onmonthly and quarterly operating results.

 

Largefluctuations in the market price of natural gas and electricity within shortperiods of time also may have a negative impact on the availability of creditnecessary to operate our business.

 

**We are subject to directcredit risk for certain customers who may fail to pay their bills as theybecome due.**

 

We bear directcredit risk related to our customers located in markets where accountsreceivable are not guaranteed by LDCs.  This group of customers representedapproximately 51% of our sales of natural gas and electricity during the fiscalyear ended June 30, 2010.  With theexception of customers in Georgia and Texas, we have the ability to terminateour agreement with customers in the event of non-payment, but we cannotterminate their electricity or natural gas service.  Even if we terminate service to customers whofail to pay their utility bill, we remain liable to our suppliers ofelectricity and natural gas for the cost of those commodities.  Furthermore, in the Georgia and Texas markets,we are responsible for billing the distribution charges for the local utilityand are at risk for these charges, in addition to the cost of the commodity, inthe event customers fail to pay their bills.  Changing economic factors, such as risingunemployment rates and energy prices also result in a higher risk of customersbeing unable to pay their bills when due.

 

The failure of ourcustomers to pay their bills or our failure to maintain adequate billing andcollection procedures could adversely affect our results of operations orfinancial condition.

 

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**We are subject to credit,operational and financial risks related to certain LDCs that provide billingservices and guarantee the customer receivables for their markets.**

 

Incertain markets, we rely on the LDC to guarantee customer accounts receivableand to perform timely and accurate billing. Sales within these guaranteed markets represented approximately 49% ofour total sales of natural gas and electricity during the fiscal year ended June30, 2010.  As our business grows, theproportion of customers we serve that are billed by utilities couldincrease.  The bankruptcy of an LDC couldresult in a default in such LDC’s payment obligations to us.

 

In addition, LDCsthat provide billing services and guarantee customer accounts receivable relyon us for accurate and timely communication of contract rates and otherinformation necessary for accurate billing to customers.  The number of territories within which weprovide natural gas and electricity supply demands considerable management,personnel and information system resources. Each territory requires unique andoften varied electronic data interface systems.  Rules that govern the exchange of data may bechanged by the LDCs.  In certaininstances, we must rely on manual processes and procedures to communicate datato LDCs for inclusion in customer bills.  Failure to provide accurate data to LDCs on atimely basis could adversely impact our results of operations.

 

**Settlementsof imbalance receivables from certain LDCs and independent system operators maybe subject to such LDCs’ or independent system operators’ ability to settletheir imbalance receivables from other retail marketers.**

 

Retailenergy marketers are responsible for providing adequate natural gas to LDCs andelectricity to independent system operators (“ISOs”) for ultimate delivery tocustomers.  Commodity amounts providedare generally based on estimates of customer usage over a prescribed period.  Imbalances occur when commodity amountsdelivered by us to an LDC (for natural gas) or an ISO (for electricity) exceedamounts consumed by our customers (resulting in a receivable from the LDC orISO) or when commodity amounts consumed by our customers exceed amountsdelivered by us to the LDC or ISO (resulting in a payable to the LDC or ISO).  Certain LDCs and ISOs rely on collection ofimbalances payable to them in order to settle imbalances payable by them toretail marketers.  If retail marketersdefault on their obligations to settle an imbalance owing to an LDC or an ISO,such LDC or ISO may not have adequate resources to satisfy its obligation tosettle imbalances owing to marketers.  Therefore, the inability of an LDC or an ISOto collect imbalance amounts from other retail energy marketers may hinder ourability to collect imbalance amounts owed to us by such an LDC or ISO.

 

**We depend on the accuracy ofdata in our billing systems.  Inaccuratedata could have a negative impact on our results of operations, financialcondition, cash flows and reputation with customers and/or regulators.**

 

We depend on theaccuracy and timeliness of customer billing, collections and consumptioninformation in our information systems.  We rely on many internal and external sourcesfor this information, including:

 

·               our internal marketing, pricing, information systems and customeroperations functions;

·               LDCs and ISOs with which we have billing service agreements; and

·               various LDCs and ISOs for volume or meterread information, certain billing rates and billing types (e.g., budgetbilling) and other fees and expenses.

 

Inaccurate or untimely information, which may beoutside of our direct control, could result in:

 

·               inaccurate and/or untimely bills sent to customers;

·               inaccurate accounting and reporting of customer revenues, gross profitand accounts receivable activity;

·               customer complaints; and

·               increased regulatory scrutiny.

 

**TheCommodity Supply Facility is an exclusive arrangement to purchase natural gasand electricity from a single supplier. The lack of competitive suppliers could result in higher commoditysupply prices for us.**

 

Priorto the Restructuring, we purchased natural gas and electricity from a portfolioof producers, marketers and energy trading firms in either a producing regionor at delivery points.  The ability tosource supply from multiple suppliers ensured a competitive pricing environmentin which we could seek the lowest possible price for our business.

 

EffectiveSeptember 22, 2009, we are required to purchase natural gas and electricityfrom RBS Sempra under an exclusive supply arrangement.  Under the terms of the Commodity SupplyFacility, we have the ability to: (1) seek commodity price quotes from thirdparties for certain physically or financially settled transactions with respectto gas and electricity; and (2) request that RBS Sempra enter into suchtransactions with such third parties at such prices and to concurrently enterinto back-to-back off-setting transactions with us with respect to such thirdparty transactions.  RBS Sempra would notbe obligated to enter into a transaction with any third party unless it issatisfied with the proposed transaction and counterparty

 

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andthe volume of those transactions does not exceed annual limits.  In addition to the actual purchase price paidby RBS Sempra and certain related costs and expenses, we will be charged a feefor such purchases.

 

Thereis no guarantee that RBS Sempra would approve purchases of natural gas andelectricity from third-parties when the prices offered by those third partiesare beneficial to us.  Additionally, ifRBS Sempra approves these transactions, RBS Sempra will charge us a fee andother transaction-related costs, which would decrease the benefit to us.  As a result, our ability to obtain the lowestpossible pricing for commodity transactions may be reduced, which may result inhigher commodity costs and lower gross profit per unit of natural gas orelectricity sold to our customers.

 

**Inconnection with the Commodity Supply Facility, RBS Sempra currently manages thescheduling of natural gas and electricity deliveries to LDCs and natural gastransportation logistics and storage capacity that we formerly managedinternally.  As a result, we have lessdirect control over scheduling of natural gas and electricity to LDCs, which couldresult in lower reliability for deliveries to customers.**

 

Priorto the Restructuring, we managed natural gas and electricity supply and naturalgas storage capacity and transportation logistics internally.  We have well-trained management and staff whohave developed strong expertise and effective working relationships related tothese functions.  RBS Sempra now managesthese functions in connection with the Commodity Supply Facility, with theoperating support of our management and staff. If RBS Sempra fails to effectively manage these functions, or fails toappropriately utilize our expertise, deliveries of natural gas and electricityto LDCs, and ultimately to our customers, could become less reliable, whichcould have a negative impact on our reputation and results of operations.

 

**RBS Sempra’smajority owner announced that it intends to sell its stake in RBS Sempra, whichcould impact RBS Sempra’s ability to function as our primary commodity hedgeand credit provider.**

 

RoyalBank of Scotland Group announced that it intends to divest its majorityinterest in RBS Sempra.  We are uncertainwhether such a divestiture will occur, whether it will occur in an orderlyfashion, whether RBS Sempra’s ability to maintain its operations will beimpacted, or whether its ability to provide us with commodity and economichedges pursuant to the Commodity Supply Facility will be affected.  If RBS Sempra is unable to meet its supply,credit and hedging obligations under the Commodity Supply Facility, ourliquidity position and operations may be adversely affected.

 

**We depend on local transportation and transmission facilities of thirdparties to supply our customers. Our financial results may be harmed iftransportation and transmission availability is limited or unreliable.**

 

We depend on transportation and transmissionfacilities owned and operated by utilities and other energy companies todeliver the electricity and natural gas we sell to customers.  Under theregulatory structures adopted in most jurisdictions, we are required to enterinto agreements with local incumbent utilities for use of the localdistribution systems and to establish functional data interfaces necessary toserve our customers.  Any delay in the negotiation of such agreements orinability to enter into reasonable agreements could delay or negatively impactour ability to serve customers in those jurisdictions, which could have anadverse impact on our business, results of operations, and financial condition.

 

We also depend on local utilities for maintenanceof the infrastructure through which we deliver electricity and natural gas toour customers.  We are unable to control the level of service theutilities provide to our customers.  Any infrastructure failure thatinterrupts or impairs delivery of electricity or natural gas to our customerscould cause customer dissatisfaction, which could adversely affect ourbusiness.  If transportation ortransmission is disrupted, or if transportation or transmission capacity isinadequate, our ability to sell and deliver products may be hindered. Such disruptions could also hinder our providing electricity or natural gas toour customers and adversely impact our risk management policies, hedgecontracts and financial results and condition.

 

Regulations in many markets require that meterreading and the billing and collection processes be retained by the localutility.  In those states, we also are required to rely on the localutility to provide us with our customers’ information regarding energyusage.  Our inability to confirm information received from the utilitiescould negatively impact our reputation with customers and, therefore, our salesand results of operations.

 

**We are subject to competition in each of the markets that we serve.**

 

While there are barriers to entry, we operate onlyin markets that are open to alternate energy suppliers. Competition is basedprimarily on product offering, price and customer service.  We generallyface competition in those markets from utility-affiliated retail marketers andsmall to mid-size independent retail energy companies.  Some of thesecompetitors or potential competitors may be larger and better capitalized thanwe are.

 

Increasing our market share depends in part on ourability to convince customers to switch to our service. The local utilitieshave the advantage of long-standing relationships with their customers, longeroperating histories, greater financial strength

 

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and greater name recognition than we do. Inaddition, customers may be less familiar with the fixed price product that weoffer, and we may not be successful in educating potential customers about thebenefits of fixed price energy supply nor of the other products we offer.Convincing customers to switch to a new company for the supply of a criticalcommodity such as electricity or natural gas is a challenge. If our marketingstrategy is not successful, our business, results of operations and financialcondition will be adversely affected.

 

In addition, our marketing efforts may be hinderedin a market where our offers are less competitive relative to price offeringsof the utilities or other marketers. Utilities historically react more slowlyto changing commodity prices, whereas our products generally reflect theprevailing market prices. These factors may result in less effective marketingor higher than anticipated attrition.

 

**We depend on continued state and federal regulation to permit us tooperate in deregulated segments of the natural gas and electricityindustries.  If competitive restructuring of the natural gas andelectricity utility industries are altered, reversed, discontinued or delayed,our business prospects and financial results could be materially adverselyaffected.**

 

The regulatory environment applicable to theelectricity and natural gas LDC distribution systems has undergone substantialchange over the past several years as a result of restructuring initiatives atboth the state and federal levels.  We have targeted the deregulatedsegments of the electricity and natural gas markets created by theseinitiatives.  Regulations may be revised or reinterpreted or new laws andregulations may be adopted or become applicable to our operations or us. Such changes may have a detrimental impact on our business, including ourability to use our established marketing channels.

 

In certain deregulated electricity markets,proposals have been made by governmental agencies and/or other interestedparties to re-regulate areas of these markets.  Other proposals tore-regulate may be made and legislated or other attention to the electric andgas restructuring process may: (i) delay or reverse the deregulationprocess; (ii) interfere with our ability to do business; (iii) inhibitour growth; (iv) increase our commodity, operating or financing costs; or (v) otherwiseimpact our profitability. If competitive restructuring of electricity andnatural gas markets is altered, reversed, discontinued or delayed, our businessprospects and financial results could be negatively impacted.

 

**As a result of recent economic events affecting the U.S. and worldeconomies, the federal government recently enacted new legislation pursuant towhich various federal agencies will implement new regulations for the financialservices industry that could have an impact on the availability and cost ofcredit and hedging instruments.**

 

The federal government recently enacted the Dodd-Frank WallStreet Reform and Consumer Protection Act pursuant to which various federalagencies will implement new regulations thatwill have significant impacts on the operations of financial institutions.  The impact of such regulations may affect theability of financial institutions to offer credit and hedging instrumentswithout significant additional capital or other costs to them.  Such increases in capital and other costs tofinancial institutions may result in higher costs to us in connection with ourCommodity Supply Facility, which could increase our commodity, operating orfinancing costs or otherwise impact our profitability.

 

**We may not be able to manage our growth successfully, which couldstrain our liquidity and other resources and lead to poor customer satisfactionwith our services.**

 

We intend to continue to assess new productofferings, apply new technologies for our business development and makeinvestments in acquisitions of complementary companies.  If we buy acompany or business, we may experience difficulty integrating that company’spersonnel and operations, or key personnel of the acquired company may decidenot to work for us.  Furthermore, if we acquire the residential or smallcommercial businesses of an incumbent utility or other energy provider in aparticular market, the customers of that entity may not be under any obligationto use our services.  If we make other types of acquisitions, we mayexperience difficulty in assimilating the acquired technology or products intoour operations or information systems.  These difficulties could disruptour ongoing business, distract our management and employees and increase ourexpenses.

 

Among other things, the growth of our operationswill depend upon our ability to expand our customer base in our existingmarkets and to enter new markets in a timely manner at reasonable costs. We anticipate that our employee base will grow to accommodate our increasedcustomer base.  As we expand our operations, we may encounter difficultiesintegrating new customers and employees as well as any legacy systems ofacquired entities.  We also may experience difficulty managing the growthof a portfolio of customers that is diverse with respect to the types ofservice offerings, applicable market rules and the infrastructure for productdelivery.

 

Expanding our operations could result in increasedliquidity needs to support working capital, for the purchase of natural gas andelectricity supply to meet our customers’ needs, for the credit requirements offorward physical supply and for generally higher operating expenses.  TheCommodity Supply Facility may not be adequate to meet these higher liquidityrequirements.

 

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Expanding our operations also may require continueddevelopment of our operating and financial controls and may place additionalstress on our management and operational resources.  If we are unable tomanage our growth and development successfully, our operating results,financial condition and internal controls over financial reporting could beadversely affected.

 

**Our success depends on key members of our management, the loss of whomcould disrupt our business operations.**

 

We depend on the continued employment andperformance of key management personnel.  A number of our seniorexecutives have substantial experience in consumer and energy markets that haveundergone regulatory restructuring and have extensive risk management and hedgingexpertise.  We believe their experience is important to our continuedsuccess.  If our key executives do not continue in their present roles andare not adequately replaced, our business operations could be adverselyaffected.  In addition, failure to retain or adequately replace our chiefexecutive officer or chief financial officer could give rise to a default underthe Commodity Supply Facility.

 

**We rely on a capable, well-trained workforce to operateeffectively.  Retention of employees with strong industry or operationalknowledge is essential to our ongoing success.**

 

Many of the employee positions within our customeroperations, information systems, pricing, marketing, risk management andfinance functions require extensive industry, operational or financialexperience that may not be easily replaced if an employee were to leaveemployment with us.  While some normal employee turnover is expected, andadditional turnover may occur due to reduced job responsibilities in certainroles as a result of the Restructuring, unusually high turnover could strainour ability to manage our ongoing operations as well as inhibit organic andacquisition growth.

 

**We are susceptible to downturns in general economic conditions, whichcould have a material adverse affect on our business, results of operations andfinancial condition.**

 

The natural gas and electricity industries havehistorically been affected by general economic downturns, including conditionswithin the housing market.  Periods of slowed economic activity generallyresult in decreased natural gas and electricity consumption, and could resultin increased customer attrition.  As a consequence, national or regionalrecessions or downturns in economic activity that impact our industrial,commercial and residential customers could adversely affect our revenues, ourcollections of billed accounts receivable and our cash flows, and couldrestrict our future growth in certain markets, any of which could have anadverse effect on our business, results of operations and financial condition.

 

General economic conditions can also impact theperformance of various counterparties to various arrangements, including:

 

·                  failure of a supplier to deliver commodity at a specified time for aspecified price under existing supply agreements, which could result in penaltyassessments against us and/or could result in higher commodity prices frompurchasing replacement commodities on the spot market;

·                  failure of local transportation and transmission facilities to allowtheir facilities to be utilized in accordance with related agreements, whichcould result in significant delays in delivery or higher costs associated withalternate facilities;

·                  failure of other contracted entities to delivergoods or services when due or requested; and

·                  failure of performance by a counterparty to ourhedge positions or lending agreements.

 

Such failures to perform by our businesscounterparties could have an adverse effect on our business, results ofoperations and financial condition.

 

**The successes, failures or activities of various LDCs and other retailmarketers within the markets that we serve may impact the perception of theCompany.**

 

The general perception on the part of customers andregulators of utilities and retail energy marketers in general, and the Companyin particular, is essential for our continued growth and success. Questionable pricing, billing, collections or customer service practices on thepart of any utility or retail marketer can damage the reputation of all marketparticipants, which could result in lower customer renewals and impact ourability to sign-on new customers.  Any utility or retail marketer that defaultson its obligations to its customers, suppliers, lenders, hedge counterparties,or employees can have a similar impact on the retail energy industry as a wholeand on our operations in particular.

 

**We are subject to regulatory scrutiny in all of our markets. Failure to follow prescribed regulatory guidelines could result in customercomplaints and regulatory sanctions.**

 

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We generally must apply to become a retail marketerof natural gas and electricity in the markets that we serve.  Approval bythe local regulatory body is subject to our understanding of and compliancewith various federal, state and local regulations that govern the activities ofretail marketers.  If we fail to comply with all such regulations, wecould suffer certain consequences, which may include:

 

·                  higher customer complaints and attrition;

·                  increased regulatory scrutiny and sanctions, up to and includingtermination of our license or ability to operate in those markets; and

·                  damage to our reputation with customers andregulators.

 

**We expend extensive resources to convert, improve and maintain ourinformation systems and related computer hardware.  Failure to continue tosuccessfully do so may result in a negative impact on our results ofoperations, financial condition, cash flow and reputation with our customersand/or regulators.**

 

Our operations rely heavily on the quality of ourinformation systems, computer hardware and the employees that are responsibleto manage them.  If any of our system conversion or improvement projectsis unsuccessful, if we experience a catastrophic malfunction in any of ourhardware or software, or if our processes for managing and maintaining ourinformation systems are inadequate, we could be subjected to:

 

·                  inaccurate or non-timely financial accounting and reporting information;

·                  inaccurate or non-timely customer billing information;

·                  customer complaints;

·                  increased regulatory scrutiny;

·                  inability to successfully complete future business combinations or othercustomer acquisitions; and/or

·                  inaccurate forecasts of expected customerconsumption requirements, potentially resulting in misalignment with hedgedpositions and related impact on gross profit.

 

**Our operations in Houston, Texas and the communities where ouremployees and certain of our customers live are located along the southeastcoast of Texas and are vulnerable to hurricanes in the Gulf of Mexico.**

 

Because of its proximity to the Gulf of Mexico, thesoutheastern coast of Texas is vulnerable to hurricanes, which can causesignificant damage to property and public infrastructure.  In particular,damage to property and disruption of electrical and other basic utilities forextended periods can have a devastating impact on areas struck by hurricanes,including our leased facilities in Houston, Texas and the surroundingcommunities where our employees live.  In addition, because we provideelectricity to customers along the southeast coast of Texas, extendeddisruption of electrical service also could have an adverse impact on ourresults of operations.

 

We have a business continuity plan that isperiodically reviewed and enhanced to ensure that the effects of suchdisruptions on our operations result in minimal impact on service provided toour customers and on our results of operations. If our business continuity plan does not function as planned, ouroperations, financial position and results of operations may be negativelyimpacted.

 

**Our reliance on the electrical power generation and transmissioninfrastructure within the U.S. and Canada makes us vulnerable to large-scalepower blackouts.**

 

The power generation and transmissioninfrastructure in the U.S. is very complex.  Maintaining reliability ofthe infrastructure requires appropriate oversight by regulatory agencies,careful planning and design, trained and skilled operators, sophisticatedinformation technology and communication systems, ongoing monitoring and, wherenecessary, improvements to various components of the infrastructure. Despite extensive oversight and development of numerous safeguards, majorelectric power blackouts are possible, which could disrupt electrical servicefor extended periods of time to large geographic regions of the U.S. andCanada.  If such a major blackout were to occur, we may be unable todeliver electricity to our customers in the affected region, which would havean adverse impact on our results of operations.

 

**We identifieda material weakness in the design and operation of our internal controls overfinancial reporting as of June 30, 2010 and 2009.  Although we instituted new controls andprocesses to address the material weakness during fiscal year 2010, there can beno assurance that such controls will effectively prevent material misstatementsin our consolidated financial statements in future periods.**

 

Inour Annual Report on Form 10-K for the fiscal year ended June 30,2009, we reported our conclusion that a combination of significantdeficiencies, when considered in the aggregate, constituted a material weaknessin our internal control over financial reporting.  For certain of the deficiencies noted as of June 30,2009, we instituted and tested new controls and processes, which we concludedwere effective during fiscal year 2010.

 

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Certainprior deficiencies still exist as of June 30, 2010, resulting inadjustments to our accounting records at June 30, 2010 for amounts thatrelated to quarterly and annual periods previously reported.  These adjustments were not deemed bymanagement to be material, individually or in the aggregate, in relation to ourfinancial position or results of operations, taken as a whole, for any annualor quarterly reporting period during fiscal years 2010 or 2009.  However, we concluded that the deficiency continuesto be a material weakness in the design and operation of our internal controlsover financial reporting as of June 30, 2010 such that there was areasonable possibility that a material misstatement of our interim or annualfinancial statements would not have been prevented or detected on a timelybasis.

 

Asof June 30, 2010, we have instituted enhanced processes and controls tosupport and validate the proper recording of revenue for substantially all ofour markets.  Because controls for someof the markets were completed late in our fiscal year, however, we have not yetadequately tested the effectiveness of the controls for those markets.  While we believe that these enhanced controlsand processes will remedy the material weakness, there can be no assurance thatsuch controls will effectively prevent material misstatements in ourconsolidated financial statements.

 

**Risks Related to Liquidity, Indebtedness andCapital Structure**

 

**We may needto raise additional debt or letter of credit capacity to fund growth oroperations, which may not be available to us on favorable terms or at all.**

 

Ourbusiness requires substantial capital to fund growth through organic marketingor acquisition, for supporting working capital, for the purchase of natural gasand electricity supply to meet our customers’ needs, and for the creditrequirements of forward physical supply. We may need to incur additional debt or obtain additional letter ofcredit capacity in order to fund working capital, finance other acquisitions orfor other purposes.  Our ability to obtain new financing will beconstrained by the current economic conditions affecting financial markets andby the restrictive covenants contained in the agreements that govern the CommoditySupply Facility and the Fixed Rate Notes due 2014.  Specifically, the recent credit crisis andother related trends affecting the banking industry have caused significantoperating losses and failures throughout the banking industry.  Many lenders and institutional investors haveceased to provide funding to potential borrowers.  We may be unable to take advantage ofopportunities to acquire customer portfolios or operations of other retailenergy businesses, to finance our existing operations or to otherwise expandour business as planned.  We cannot becertain that we will be able to obtain such additional financing on favorableterms or at all.  If we need additional debt or letter of credit capacityand cannot raise it on acceptable terms, our financial condition and businesswill be adversely affected.

 

**We willrequire a significant amount of cash to service our debt obligations.  Ourability to generate sufficient cash to service debt depends on the ability ofour primary operating subsidiaries to generate adequate cash flow.  We are limited in our ability to utilize theproceeds from new debt and equity issuances to prepay and repay the Fixed RateNotes due 2014.**

 

Holdingshas no material operating activities.  Accordingly, Holdings’ onlymaterial source of cash, including cash to service the Commodity SupplyFacility, the Fixed Rate Notes due 2014 and the Floating Rate Notes due 2011,comes from Holdings’ ownership interests in its primary operatingsubsidiaries.  Available distributions from our operating subsidiaries maydepend on factors out of our control, which may include:

 

·                  the financial performance of our operatingsubsidiaries;

·                  covenants contained in our debt agreements;

·                  covenants contained in other agreements towhich we or our subsidiaries are or may become subject;

·                  business and tax considerations; and

·                  applicable laws, including laws regarding thepayment of distributions.

 

Ourability to make payments on and to refinance our debt, and to fund plannedcapital expenditures and expansion efforts and any strategic acquisitions wemay make in the future, if any, will depend on our ability to generate cash inthe future.  This, to a certain extent, is subject to general economic,financial, competitive and other factors that are beyond our control.  There can be no assurance that our businesswill generate sufficient cash flow from operations in the future, that ourcurrently anticipated growth in net sales and cash flow will be realized orthat future borrowings will be available to us in an amount sufficient toenable us to repay indebtedness.  Additionally, the terms of the CommoditySupply Facility limit our ability to incur additional indebtedness.  We may need to refinance all or a portion ofour indebtedness on or before maturity.  There can be no assurance that wewill be able to refinance any of our indebtedness on commercially reasonableterms or at all.

 

**We areexposed to the risk of rapid and significant increases in market prices andtheir potential impact on our operations in general and on our liquidity underthe Commodity Supply Facility in particular.**

 

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Dramaticswings in the market prices for natural gas during the fiscal year ended June 30,2009 resulted in a significant strain on our liquidity under our RevolvingCredit Facility, which was terminated as part of the Restructuring.  The significant increases and decreases inmarket prices over this period highlighted the difficulty of predicting marketprices and anticipating their impact on our operations.  There can be no assurance that any actions wehave taken will mitigate the risks associated with the volatile market priceenvironment.  As a result, we willcontinue to be exposed to the risk of volatile market prices for natural gasand electricity and their impact on availability under the Commodity SupplyFacility.

 

**Oursubstantial debt obligations could adversely affect our financial health andprevent us from fulfilling such obligations, including our obligations underthe Commodity Supply Facility, the Fixed Rate Notes due 2014 and the FloatingRate Notes due 2011 and we might have difficulty obtaining additionalfinancing.**

 

Oursubstantial debt obligations could have important consequences, which couldinclude:

 

·                  making it more difficult for us to satisfyour debt service obligations;

·                  increasing our vulnerability to generaladverse economic and industry conditions;

·                  requiring us to dedicate a substantialportion of our cash flow from operations to debt service, thereby reducing theavailability of our cash flow to fund working capital, capital expenditures,acquisitions and other general corporate purposes;

·                  limiting our flexibility in planning for, orreacting to, changes in our business and the markets in which we operate;

·                  placing us at a competitive disadvantagecompared to our competitors that have less debt; and

·                  limiting our ability to borrow additionalfunds.

 

Significantincreases in energy prices or other adverse industry or financial trends thatare outside of our direct control could cause us to draw down on a portion orall of our available credit.  We may require additional indebtedness inthe future.  Our ability to obtain new debt is limited by the agreementsgoverning the CommoditySupply Facility, the Fixed Rate Notes due 2014 and the Floating Rate Notes due2011.  If new debt is added to current debt levels, the related risksdescribed above could intensify. If such debt financing is not available whenrequired or is not available on acceptable terms, we may be unable to grow ourbusiness, take advantage of business opportunities, respond to competitivepressures or refinance maturing debt, any of which could have a materialadverse effect on our operating results and financial condition.

 

**Restrictivecovenants in the terms of our financings may reduce our operational andfinancial flexibility, which may prevent us from capitalizing on businessopportunities.**

 

Theagreements that govern the Commodity Supply Facility and the Fixed Rate Notesdue 2014 contain a number of operating and financial covenants restrictingHoldings’ and its subsidiaries’ ability to, among other things:

 

·                  incur additional indebtedness;

·                  create liens on assets;

·                  pay dividends or distributions on, or redeemor repurchase, capital stock;

·                  make investments;

·                  transfer or sell assets;

·                  guarantee debt;

·                  restrict dividends and other payments;

·                  consolidate, merge or transfer all orsubstantially all assets and the assets of subsidiaries; and

·                  engage in unrelated businesses.

 

Inaddition, under the Commodity Supply Facility, Holdings and its subsidiariesare required to maintain a collateral coverage ratio.  If we breach any of the covenants containedin the agreements that govern the Commodity Supply Facility or the indenture,the principal of, and accrued interest on, the applicable debt could become dueand payable.  In addition, that defaultcould constitute a cross-default under our other indebtedness.  Although any default under the Fixed RateNotes due 2014 is subject to certain standstill provisions, if such a defaultor cross-default were to occur, we would not be able to satisfy our debtobligations, which would have a substantial material adverse impact on ourability to continue as a going concern. There can be no assurance that we will be able to comply with theserestrictions in the future or that our compliance would not cause us to foregoopportunities that might otherwise be beneficial to us.

 

**As a resultof the Restructuring, our amended organizational documents and governanceagreements and the significant changes in our equity ownership could have amaterial impact on the Company’s future strategic direction.**

 

Asa result of the Restructuring, there was a significant change in ourownership.  In addition, holders of our Class ACommon Stock, Class B Common Stock and Class C Common Stock weregiven separate approval rights under our organizational documents, which couldhave an impact on the future direction of the Company, including decisionsregarding financing arrangements, capital structure, senior managementappointments and business operations. The interests of the

 

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holdersof the various classes of our common stock may not be compatible with theinterests of other shareholders and directors, or with the strategic objectivesof senior management of the Company.

 

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**ITEM1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM2.  PROPERTIES**

 

Certainof our executive, finance, marketing, internal audit and legal functions arelocated in our corporate headquarters in Stamford, Connecticut.  Substantially all of our operations,including pricing, information technology and data solutions, risk management,supply, customer operations, accounting, billing and collections and certainhuman resources functions are located in Houston, Texas, where most of ouremployees currently work.  We also havecustomer care and various other staff located in Annapolis Junction, Maryland.

 

Welease all of our properties.  As ofJune 30, 2010, we believe that all properties are suitable and adequatefor the business conducted therein, are being appropriately used and havesufficient capacity for the present intended purposes.

 

**ITEM3.  LEGAL PROCEEDINGS**

 

Fromtime to time, we are a party to claims and legal proceedings that arise in theordinary course of business, including investigations of product pricing,billing practices and employment matters by various governmental or otherregulatory agencies.  We do not believethat any such proceedings to which we are currently a party will have amaterial adverse impact on our results of operations or financial position.

 

**ITEM4.  (REMOVED AND RESERVED)**

 

None.

 

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**PART II.**

 

**ITEM5.  MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

Thereis no established trading market for our common stock, par value $0.01 pershare.  As of August 31, 2010, therewere 49 holders of record of our Class A Common Stock, 1 holder of recordof our Class B Common Stock and 78 holders of record of our Class CCommon Stock.

 

**Dividend Policy and Restrictions**

 

OurBoard of Directors, at its discretion, has the authority to declare and paydividends on our common stock, subject to the conditions and limitations setforth in various debt, supply and hedging agreements.  We are restricted in our ability to paydividends by various provisions of agreements that govern the Commodity SupplyFacility, the Fixed Rate Notes due 2014 and the Floating Rate Notes due2011.  Refer to “Liquidity and CapitalResources” in Item 7 of this Annual Report for additional information regardingdividend restrictions and the agreements that govern the Commodity SupplyFacility, the Fixed Rate Notes due 2014 and the Floating Rate Notes due 2011.

 

Wehave never declared or paid any cash dividends on our common stock and do not intendto pay any cash dividends on our common stock in the foreseeable future.  We currently intend to retain any futureearnings in order to finance the expansion of our business and for generalcorporate purposes.

 

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**ITEM6.  SELECTED FINANCIAL DATA**

 

**Adjusted EBITDA**

 

Managementbelieves that Adjusted EBITDA, which is not a financial measure recognizedunder U.S. GAAP, is a measure commonly used by financial analysts in evaluatingoperating performance and liquidity of companies, including energycompanies.  Management also believes thatthis measure allows a standardized comparison between companies in the energyindustry, while minimizing the differences from depreciation policies,financial leverage, hedging strategies and tax strategies.  Accordingly, management believes thatAdjusted EBITDA is the most relevant financial measure in assessing ouroperating performance and liquidity. Adjusted EBITDA, as used herein, is not necessarily comparable tosimilarly titled measures of other companies.

 

EBITDAis defined as net income (loss) before interest expense, income tax expense(benefit), depreciation and amortization. Adjusted EBITDA is defined by management as net income (loss) beforeinterest expense, income tax expense (benefit), depreciation, amortization,stock compensation expense and unrealized gains (losses) from risk managementactivities.  Management believes theitems excluded from EBITDA to calculate Adjusted EBITDA are not indicative oftrue operating performance or liquidity of the business and generally reflectnon-cash charges.  Therefore, we believethat EBITDA would not provide an accurate reflection of the economicperformance of the business since it includes the unrealized gains (losses)from risk management activities without giving effect to the offsetting changesin market value of the underlying customer contracts that are being economicallyhedged.  In addition, as the underlyingcustomer contracts are not marked-to-market, the unrealized gains (losses) fromrisk management activities do not offer an accurate indication of the ultimatecash impact to the business, as the ultimate cash impact to the business is notdeterminable until delivery of natural gas and electricity under the customercontracts and the associated realized gain (loss) on risk management activity.

 

Managementuses Adjusted EBITDA for a variety of purposes, including assessing ourperformance and liquidity, allocating our resources for operational initiatives(e.g., establishing margins on sales initiatives), allocating our resources forbusiness growth strategies (e.g., considering acquisition opportunities),determining new marketing initiatives, determining new market entry andrationalizing our internal resources.  Inaddition, Adjusted EBITDA is a key variable for estimating our equity value,including various equity instruments (such as common stock, restricted stockunits, stock options and warrants), and assessing compensation incentives forour employees.  Management also providesfinancial performance measures to our senior executive team and significantshareholders with an emphasis on Adjusted EBITDA, on a consolidated basis, asthe appropriate basis with which to measure the performance and liquidity ofour business.  Furthermore, certainfinancial ratios and covenants in the agreements governing our Commodity SupplyFacility is based on EBITDA and the items defined above that are excluded tocalculate Adjusted EBITDA, as well as other items.  Accordingly, management and our significantshareholders utilize Adjusted EBITDA as a primary measure when assessing ouroperating performance and the liquidity of our business.

 

EBITDAand Adjusted EBITDA have limitations as analytical tools in comparison tooperating income or other combined income data prepared in accordance with U.S.GAAP, including the following:

 

·                  They do notreflect cash outlays for capital expenditures or contractual commitments;

·                  They do notreflect changes in, or cash requirements for, working capital;

·                  They do notreflect the interest expense or the cash requirements necessary to serviceinterest or principal payments on indebtedness;

·                  They do notreflect income tax expense or the cash necessary to pay income taxes;

·                  Althoughdepreciation and amortization are non-cash charges, the assets beingdepreciated and amortized will often have to be replaced in the future, andEBITDA and Adjusted EBITDA do not reflect cash requirements for suchreplacements;

·                  Adjusted EBITDAdoes not reflect the impact of earnings or charges resulting from matters weconsider not to be indicative of our ongoing operations; and

·                  Othercompanies, including other companies in our industry, may calculate thesemeasures differently than as presented in this Annual Report, limiting itsusefulness as a comparative measure.

 

Becauseof these limitations, EBITDA and Adjusted EBITDA and the related ratios shouldnot be considered as a measure of discretionary cash available to invest inbusiness growth or reduce indebtedness.

 

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Thefinancial data included in the following table was derived from ourconsolidated financial statements, which are included elsewhere in this AnnualReport.  The table includes areconciliation from net income (loss) calculated on a U.S. GAAP basis to EBITDAand Adjusted EBITDA.  The financialinformation in the table should be read in conjunction with, and is qualifiedby reference to, our consolidated financial statements and notes thereto andcommentary included in this section.

 
| ** **                                              | ** **                                                          | **Fiscal Year Ended June 30,** | ** **  |
|---------------------------------------------------------|---------------------------------------------------------------------|----------------------------------------------------|-------------|
| ** **                                              | ** **                                                          | **2010**                                           | ** **  | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                              | ** **                                                          | **(in thousands)**                            | ** **  |
| **Selected statement of  operations data:**             |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| Sales of natural gas and electricity (1)                | ** **                                                          | **$**                                              | **561,206** |   | $ | 789,780 |   | $ | 752,283 |   | $ | 703,926 |   | $ | 362,561 |   |
| Cost of goods sold (1)                                  | ** **                                                          | **408,006**                                        |        | 757,146 |   | 569,585 |   | 602,146 |   | 389,526 |   |
| Gross profit (loss)                                     | ** **                                                          | **153,200**                                        |        | 32,634 |   | 182,698 |   | 101,780 |   | (26,965 | ) |
| Operating expenses                                      | ** **                                                          | **92,021**                                         |        | 114,779 |   | 106,645 |   | 91,015 |   | 36,618 |   |
| Operating profit (loss)                                 | ** **                                                          | **61,179**                                         |        | (82,145 | ) | 76,053 |   | 10,765 |   | (63,583 | ) |
| Interest expense, net of interest income                | ** **                                                          | **34,982**                                         |        | 45,305 |   | 34,105 |   | 33,058 |   | 3,200 |   |
| Income (loss) before income tax (expense) benefit       | ** **                                                          | **26,197**                                         |        | (127,450 | ) | 41,948 |   | (22,293 | ) | (66,783 | ) |
| Income tax (expense) benefit                            | ** **                                                          | **(14,692**                                        | **)**       | 27,249 |   | (17,155 | ) | 8,495 |   | 27,001 |   |
| Net income (loss)                                       | ** **                                                          | **11,505**                                         |        | (100,201 | ) | 24,793 |   | (13,798 | ) | (39,782 | ) |
|                                                    |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| Items to reconcile net (loss) income to EBITDA:         |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| Add (less):                                             | Interest expense, net of interest income (2)                        | ** **                                         | **34,982**  |   | 45,305 |   | 34,105 |   | 33,058 |   | 3,200 |   |
|                                                    | Depreciation and amortization                                       | ** **                                         | **22,174**  |   | 37,575 |   | 32,698 |   | 27,730 |   | 8,504 |   |
|                                                    | Income tax (benefit) expense                                        | ** **                                         | **14,692**  |   | (27,249 | ) | 17,155 |   | (8,495 | ) | (27,001 | ) |
| EBITDA                                                  | ** **                                                          | **83,353**                                         |        | (44,570 | ) | 108,751 |   | 38,495 |   | (55,079 | ) |
|                                                    |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| Items to reconcile EBITDA to Adjusted EBITDA:           |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| Add (less):                                             | Stock compensation expense                                          | ** **                                         | **2,363**   |   | 519 |   | 3,358 |   | 4,539 |   | 911 |   |
|                                                    | Unrealized (gains) losses from risk management  activities, net (3) | ** **                                         | **(27,139** | **)** | 87,575 |   | (67,168 | ) | 17,079 |   | 79,897 |   |
| Adjusted EBITDA                                         | ** **                                                          | **$**                                              | **58,577**  |   | $ | 43,524 |   | $ | 44,941 |   | $ | 60,113 |   | $ | 25,729 |   |
|                                                    |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| **Selected balance sheet data  (period-end balances):** |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| Total current assets                                    | ** **                                                          | **$**                                              | **148,324** |   | $ | 203,506 |   | $ | 271,973 |   | $ | 257,708 |   | $ | 67,517 |   |
| Customer acquisition costs, net                         | ** **                                                          | **30,425**                                         |        | 27,950 |   | 41,693 |   | 38,954 |   | 10,822 |   |
| Total assets                                            | ** **                                                          | **202,020**                                        |        | 259,071 |   | 355,752 |   | 335,644 |   | 97,969 |   |
| Total current liabilities                               | ** **                                                          | **54,490**                                         |        | 99,042 |   | 108,276 |   | 91,686 |   | 29,894 |   |
| Long-term debt (4)                                      | ** **                                                          | **58,722**                                         |        | 163,476 |   | 162,648 |   | 185,404 |   | — |   |
| Redeemable convertible preferred stock (5)              | ** **                                                          | **—**                                         |        | 54,632 |   | 48,779 |   | 29,357 |   | 29,357 |   |
| Total stockholders’ equity                         | ** **                                                          | **86,951**                                         |        | (72,150 | ) | 33,210 |   | 25,611 |   | 35,393 |   |

 

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(1)          Sales of natural gas andelectricity and cost of goods sold each include pass-through revenue, primarilyrepresenting transportation and distribution charges billed to customers onbehalf of certain LDCs, of approximately $56.8 million, $68.3 million, $63.6million and $54.5 million for the fiscal years ended June 30, 2010, 2009,2008 and 2007, respectively.  Sales ofnatural gas and electricity also include fee income charged to customers, suchas late payment fees, early termination fees and service shut-off fees ofapproximately $18.6 million, $22.4 million, $19.4 million and $17.1 million forthe fiscal years ended June 30, 2010, 2009, 2008 and 2007,respectively.  Pass-through revenue andfee income were not material for fiscal years prior to 2007;

(2)          Interest expense includesinterest and fees incurred in connection with debt instruments, supplyfacilities and hedging facilities. Interest expense also includes non-cash amortization of deferred debtissuance costs and original issue discount of approximately $11.6 million,$10.3 million and $5.3 million for fiscal years 2010, 2009 and 2008,respectively.

(3)          Unrealized gains and lossesfrom risk management activities result from changes in forward natural gas andelectricity prices during the respective periods in relation to the contractedforward prices.  These amounts should befully or substantially offset in future periods, as physical commodity isdelivered to customers during the remaining terms of their fixed ratecontracts.

(4)          The Floating Rate Notes due2011 were issued during the fiscal year ended June 30, 2007 primarily toprovide financing for the SESCo acquisition, with the balance being used forworking capital needs.  Pursuant to theRestructuring, $158.8 million aggregate principal amount of Floating Rate Noteswere exchanged for cash, common stock and $67.7 million aggregate principalamount of Fixed Rate Notes due 2014.

(5)          As of June 30, 2009,the Preferred Stock was recorded at its estimated redemption value outside of stockholders’equity on the consolidated balance sheet because it was deemed to be redeemableat the option of the Preferred Investors. As of June 30, 2009, the holders of Preferred Stock did not make anelection to redeem the Preferred Stock. In connection with the Restructuring, the Preferred Stock was convertedto Class C Common Stock on September 22, 2009.

 

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Areconciliation of Adjusted EBITDA to net cash (used in) provided by operatingactivities is provided in the following table.

 
| ** **                                                                            | ** ** | **Fiscal Year Ended June 30,** | ** **  |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                                                                            | ** ** | **2010**                                           | ** **  | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                  |       |                                               |        |   |   |   |   |   |   |   |   |
| Adjusted EBITDA                                                                       | ** ** | **$**                                              | **58,577**  |   | $ | 43,524 |   | $ | 44,941 |   | $ | 60,113 |   | $ | 25,729 |   |
| Interest expense, net of interest income                                              | ** ** | **(34,982**                                        | **)**       | (45,305 | ) | (34,105 | ) | (33,058 | ) | (3,200 | ) |
| Income tax (expense) benefit                                                          | ** ** | **(14,692**                                        | **)**       | 27,249 |   | (17,155 | ) | 8,495 |   | 27,001 |   |
| Stock compensation expense                                                            |       | —                                             |        | — |   | (1,654 | ) | — |   | — |   |
| Provision for doubtful accounts                                                       | ** ** | **5,164**                                          |        | 12,009 |   | 5,051 |   | 3,018 |   |   |   |
| Deferred tax (benefit) expense                                                        | ** ** | **19,102**                                         |        | (23,406 | ) | 18,187 |   | (14,449 | ) | (32,764 | ) |
| Unrealized losses on interest rate swaps and  amortization of deferred financing fees | ** ** | **10,146**                                         |        | 16,233 |   | 10,836 |   | 7,906 |   | 1,057 |   |
| Amortization of customer contracts acquired                                           | ** ** | **(50**                                            | **)**       | (634 | ) | (762 | ) | 11,891 |   | (3,276 | ) |
| Change in assets and liabilities, net of effects  of acquisitions:                    |       |                                               |        |   |   |   |   |   |   |   |   |
| Restricted cash                                                                       | ** ** | **73,794**                                         |        | (74,781 | ) | 463 |   | (623 | ) | 6,953 |   |
| Fixed Rate Notes Escrow Account                                                       | ** ** | **(8,977**                                         | **)**       | — |   | — |   | — |   | — |   |
| Accounts receivable                                                                   | ** ** | **(6,491**                                         | **)**       | 28,066 |   | (35,232 | ) | 435 |   | (13,003 | ) |
| Accounts receivable, RBS Sempra                                                       | ** ** | **(43,054**                                        | **)**       | — |   | — |   | — |   | — |   |
| Natural gas inventories                                                               | ** ** | **13,554**                                         |        | 36,509 |   | (7,308 | ) | (1,712 | ) | (2,685 | ) |
| Income taxes receivable                                                               | ** ** | **398**                                            |        | 1,063 |   | (7,173 | ) | 5,184 |   | (5,535 | ) |
| Option premiums                                                                       | ** ** | **(335**                                           | **)**       | 1,571 |   | 1,191 |   | 1,835 |   | (1,834 | ) |
| Other assets                                                                          | ** ** | **(4,732**                                         | **)**       | (10,443 | ) | 1,916 |   | (993 | ) | 2,645 |   |
| Accounts payable and accrued liabilities                                              | ** ** | **(12,795**                                        | **)**       | (46,553 | ) | 17,882 |   | 31,555 |   | (5,320 | ) |
| Deferred revenue                                                                      | ** ** | **3,186**                                          |        | (3,164 | ) | (4,352 | ) | 9,384 |   | 865 |   |
| Net cash provided by (used in) operating  activities                                  | ** ** | **$**                                              | **57,813**  |   | $ | (38,062 | ) | $ | (7,274 | ) | $ | 88,981 |   | $ | (3,367 | ) |
| Net cash used in investing activities                                                 | ** ** | **$**                                              | **(23,660** | **)** | $ | (17,953 | ) | $ | (33,941 | ) | $ | (132,920 | ) | $ | (18,825 | ) |
| Net cash (used in) provided by financing activities                                   | ** ** | **$**                                              | **(51,199** | **)** | $ | 7,323 |   | $ | (23,769 | ) | $ | 174,788 |   | $ | (25,345 | ) |

 

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**SelectedData for Business Segments**

 

Selectedfinancial operating data for our natural gas and electricity business segmentsis provided in the following table.

 
| ** **                                                                                         | ** ** | **Natural Gas**    | ** **  | **Electricity** | ** ** | **Total**    | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|-----------------|------------|--------------|------------|
| ** **                                                                                         | ** ** | **(in thousands)** | ** **  |
| **Fiscal year ended June 30,  2010:**                                                         | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Sales                                                                                              | ** ** | **$**                   | **457,909** | ** **      | **$**      | **103,297**  | ** ** | **$** | **561,206** | ** ** |
| Cost of goods sold (excluding unrealized gains  (losses) from risk management activities, net) (1) | ** ** | **(354,615**            | **)**       | **(80,530**     | **)**      | **(435,145** | **)**      |
| Gross profit (excluding unrealized gains (losses)  from risk management activities, net) (1)       | ** ** | **$**                   | **103,294** | ** **      | **$**      | **22,767**   | ** ** | **126,061** | ** ** |
| ** **                                                                                         | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Items to reconcile total segment gross profit to  income before income tax expense:                | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Unrealized gains (losses) from risk management  activities, net                                    | ** ** | ** **              | ** **  | ** **      | ** ** | **27,139**   | ** ** |
| Operating expenses                                                                                 | ** ** | ** **              | ** **  | ** **      | ** ** | **(92,021**  | **)**      |
| Interest expense, net of interest income                                                           | ** ** | ** **              | ** **  | ** **      | ** ** | **(34,982**  | **)**      |
| ** **                                                                                         | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Income before income tax expense                                                                   | ** ** | ** **              | ** **  | ** **      | ** ** | **$**        | **26,197** | ** ** |
| ** **                                                                                         | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| **Fiscal year ended June 30,  2009:**                                                         |       |                    |        |            |       |         |       |
| Sales                                                                                              |       | $                       | 670,584     |            | $          | 119,196      |       | $ | 789,780 |   |
| Cost of goods sold (excluding unrealized gains  (losses) from risk management activities, net) (1) |       | (572,616                | )           | (96,955         | )          | (669,571     | )          |
| Gross profit (excluding unrealized gains (losses)  from risk management activities, net) (1)       |       | $                       | 97,968      |            | $          | 22,241       |       | 120,209 |   |
|                                                                                               |       |                    |        |            |       |         |       |
| Items to reconcile total segment gross profit to  loss before income tax benefit:                  |       |                    |        |            |       |         |       |
| Unrealized gains (losses) from risk management  activities, net                                    |       |                    |        |            |       | (87,575      | )          |
| Operating expenses                                                                                 |       |                    |        |            |       | (114,779     | )          |
| Interest expense, net of interest income                                                           |       |                    |        |            |       | (45,305      | )          |
|                                                                                               |       |                    |        |            |       |         |       |
| Loss before income tax benefit                                                                     |       |                    |        |            |       | $            | (127,450   | ) |
|                                                                                               |       |                    |        |            |       |         |       |
| **Fiscal year ended June 30,  2008:**                                                         |       |                    |        |            |       |         |       |
| Sales                                                                                              |       | $                       | 669,522     |            | $          | 82,761       |       | $ | 752,283 |   |
| Cost of goods sold (excluding unrealized gains  (losses) from risk management activities, net) (1) |       | (564,219                | )           | (72,534         | )          | (636,753     | )          |
| Gross profit (excluding unrealized gains (losses)  from risk management activities, net) (1)       |       | $                       | 105,303     |            | $          | 10,227       |       | 115,530 |   |
|                                                                                               |       |                    |        |            |       |         |       |
| Items to reconcile total segment gross profit to  income before income tax expense:                |       |                    |        |            |       |         |       |
| Unrealized gains (losses) from risk management  activities, net                                    |       |                    |        |            |       | 67,168       |       |
| Operating expenses                                                                                 |       |                    |        |            |       | (106,645     | )          |
| Interest expense, net of interest income                                                           |       |                    |        |            |       | (34,105      | )          |
|                                                                                               |       |                    |        |            |       |         |       |
| Income before income tax expense                                                                   |       |                    |        |            |       | $            | 41,948     |   |

 

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(1)          Includes realized losses from risk managementactivities, but excludes unrealized gains (losses) from risk managementactivities.  As the underlying customercontracts are not marked-to-market, the unrealized gains (losses) from riskmanagement activities do not offer an accurate indication of the ultimate cashimpact to the business, as the ultimate cash impact to the business is notdeterminable until delivery of natural gas under the customer contracts and theassociated gain (loss) on risk management activity is realized.

 

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Additionalselected operating data for our business segments is summarized in thefollowing table.

 
| ** **                                        | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                        | ** ** | **2010**                                           | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Natural Gas:**                                  | ** ** | ** **                                         |       |   |   |   |   |   |   |   |   |
| RCEs at period end (1)                            | ** ** | **433,000**                                        |       | 473,000 |   | 553,000 |   | 537,000 |   | 347,000 |   |
| Average RCEs during the period (1)                | ** ** | **444,000**                                        |       | 534,000 |   | 541,000 |   | 554,000 |   | 380,000 |   |
| MMBtus sold during the period                     | ** ** | **46,034,000**                                     |       | 54,806,000 |   | 54,339,000 |   | 57,064,000 |   | 35,488,000 |   |
| Sales per MMBtu sold during the period            | ** ** | **$**                                              | **9.95**   |   | $ | 12.24 |   | $ | 12.32 |   | $ | 11.93 |   | $ | 9.74 |   |
| Gross profit per MMBtu sold during the period (2) | ** ** | **$**                                              | **2.24**   |   | $ | 1.79 |   | $ | 1.94 |   | $ | 2.02 |   | $ | 1.38 |   |
| Heating degree days                               | ** ** | **4,384**                                          |       | 4,460 |   | 4,249 |   |   | (3) |   | (3) |
|                                              |       |                                               |       |   |   |   |   |   |   |   |   |
| **Electricity:**                                  | ** ** | ** **                                         |       |   |   |   |   |   |   |   |   |
| RCEs at period end                                | ** ** | **173,000**                                        |       | 82,000 |   | 90,000 |   | 40,000 |   | 11,000 |   |
| Average RCEs during the period                    | ** ** | **108,000**                                        |       | 87,000 |   | 64,000 |   | 21,000 |   | 12,000 |   |
| MWhrs sold during the period                      | ** ** | **946,000**                                        |       | 851,000 |   | 636,000 |   | 193,000 |   | 120,000 |   |
| Sales per MWhr sold during the period             | ** ** | **$**                                              | **109.19** |   | $ | 140.07 |   | $ | 130.13 |   | $ | 119.77 |   | $ | 141.10 |   |
| Gross profit per MWhr sold during the period (2)  | ** ** | **$**                                              | **24.07**  |   | $ | 26.14 |   | $ | 16.08 |   | $ | 18.54 |   | $ | 32.58 |   |
| Cooling degree days                               | ** ** | **1,318**                                          |       | 1,361 |   | 1,267 |   |   | (4) |   | (4) |

 

----

(1)          Excludes RCEs to be served in connection with theSSO Program pursuant to a one-year contract that expires March 31, 2011.

(2)          Includes fee income and realized losses from riskmanagement activities, but excludes unrealized (gains) losses from riskmanagement activities.

(3)          Data not available.

(4)          Information is not meaningful due to the relativesmall size of the electricity customer portfolio and related volumes inrelation to consolidated operations.

 

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**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Executive Overview**

 

Managementuses Adjusted EBITDA for various management purposes, which are described inItem 6 of this Annual Report. Significant activity affecting Adjusted EBITDA is summarized in thefollowing table.

 
| ** **                                                                                              | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2010**                                           | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                              | ** ** | **(in thousands)**                            | ** ** |
|                                                                                                    |       |                                               |       |   |   |   |   |   |   |   |   |
| Adjusted EBITDA for prior fiscal year                                                                   | ** ** | **$**                                              | **43,524** |   | $ | 44,941 |   | $ | 60,113 |   | $ | 25,729 |   | $ | 36,283 |   |
| Increases (decreases) in Adjusted EBITDA resulting  from:                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Changes in gross profit, excluding unrealized  (gains) losses from risk management activities, due to:  |       |                                               |       |   |   |   |   |   |   |   |   |
| Natural gas                                                                                             | ** ** | **5,326**                                          |       | (7,335 | ) | (9,977 | ) | 66,258 |   | (8,568 | ) |
| Electricity                                                                                             | ** ** | **526**                                            |       | 12,014 |   | 6,648 |   | (331 | ) | 2,420 |   |
| Lower (higher) operating expenses, excluding  depreciation, amortization and stock compensation expense | ** ** | **9,201**                                          |       | (6,096 | ) | (11,843 | ) | (31,543 | ) | (4,406 | ) |
| Adjusted EBITDA for current fiscal year                                                                 | ** ** | **$**                                              | **58,577** |   | $ | 43,524 |   | $ | 44,941 |   | $ | 60,113 |   | $ | 25,729 |   |

 

Referto “Results of Operations” below for additional commentary regarding thechanges noted in this table.

 

**Balance Sheet Overview**

 

***Guaranteed and Non-GuaranteedCustomer Accounts Receivable***

 

Accountsreceivable, net is summarized in the following table.

 
| ** **                                            | ** ** | **Balances at June 30,** | ** **       |
|-------------------------------------------------------|------------|-----------------------------------------|------------------|
| ** **                                            | ** ** | **2010**                                | ** **       | **2009** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                 | ** **       |
| Billed customer accounts receivable:                  | ** ** | ** **                              | ** **       | ** ** | ** ** |
| Guaranteed by LDCs                                    | ** ** | **$**                                   | ** 11,736** |   | $ |  7,768 |   |
| Non-guaranteed by LDCs                                | ** ** | **21,543**                              |             | 26,679 |   |
| ** **                                            | ** ** | **33,279**                              |             | 34,447 |   |
| Unbilled customer accounts receivable (1):            |       |                                    |             |   |   |
| Guaranteed by LDCs                                    | ** ** | **10,206**                              |             | 5,737 |   |
| Non-guaranteed by LDCs                                | ** ** | **7,211**                               |             | 10,547 |   |
| ** **                                            | ** ** | **17,417**                              |             | 16,284 |   |
| Total customer accounts receivable                    | ** ** | **50,696**                              |             | 50,731 |   |
| Less: Allowance for doubtful accounts                 | ** ** | **(5,074**                              | **)**            | (7,344 | ) |
| Customer accounts receivable, net                     | ** ** | **45,622**                              |             | 43,387 |   |
| Imbalance settlements and other receivables, net  (2) | ** ** | **3,303**                               |             | 4,211 |   |
| Accounts receivable, net                              | ** ** | **$**                                   | ** 48,925** |   | $ |  47,598 |   |

 

----

(1)      Unbilled customer accountsreceivable represents estimated revenues associated with natural gas andelectricity consumed by customers but not yet billed under the monthly cyclebilling method utilized by LDCs.

(2)      Cash imbalance settlementsrepresent differences between natural gas delivered to LDCs for consumption bythe Company’s customers and actual customer usage.  Such imbalances are expected to be settled incash within the next 12 months in accordance with contractual paymentarrangements with the LDCs.

 

Ourcredit risk is limited as certain LDCs guarantee billed and unbilled customeraccounts receivable or amounts due for delivered gas and electricity.  In markets where the LDC guaranteesreceivables, we are exposed only to the credit risk of the LDC, rather than thatof our actual customers.  As ofJune 30, 2010 and 2009, all of our billed and unbilled customer accountsreceivable in guaranteed markets were from LDCs with investment grade creditratings.  We periodically review paymenthistory, credit ratings and financial information for LDCs to ensure that weidentify and respond to any deteriorating trends.

 

Inthe market areas where the LDC does not guarantee customer accounts receivable,we maintain an allowance for doubtful accounts that is based upon the creditrisk of our customers, historical trends and other information.  The provision for

 

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doubtfulaccounts associated with non-guaranteed accounts receivable was 1.79%, 2.79%and 1.19% of related sales of natural gas and electricity for fiscal years2010, 2009 and 2008, respectively. Additional commentary regarding credit risk management and the provisionfor doubtful accounts is provided in Item 7 of this Annual Report.

 

Imbalancesettlements represent differences between the natural gas or electricitydelivered to LDCs or ISOs for consumption by our customers and actual usage byour customers.  We expect that suchimbalances will be settled with cash within the fiscal year following thebalance sheet date.  Imbalancesettlements will fluctuate from period to period depending on the market pricefor natural gas and electricity, weather patterns and other factors that affectcustomer consumption, and the timing of cash remittances from LDCs.  These receivables are due from LDCs withinvestment grade credit ratings. Historically, we have collected 100% of these imbalance settlementreceivables.  However, as a result of abankruptcy filing by a retail marketer in Georgia in October 2008, thecollection of our imbalance receivable position in Georgia was placed atrisk.  A preliminary settlement proposaloffered in March 2009 for resolution of the imbalance receivable resulted in usrecording an incremental provision for bad debt expense of approximately $0.6million during fiscal year 2009, which is included in our allowance fordoubtful accounts at June 30, 2010 and 2009.

 

Weoperate in 41 market areas located in 14 U.S. states and 2 Canadianprovinces.  Our diversified geographiccoverage mitigates the credit exposure that could result from concentrations ina single LDC territory, or a single regulatory jurisdiction, from extreme localweather patterns or from an economic downturn in any single geographic region.

 

Referto Item 7A of this Annual Report for additional commentary regarding ourapproach for management of credit risk associated with customer accountsreceivable.

 

***Natural Gas Inventories***

 

Naturalgas inventories are summarized in the following table.

 
| ** **                                  | ** ** | **Balances at June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **(in thousands)**                 | ** ** |
|                                        | ** ** | ** **                              | ** ** |   |   |   |   |
| Storage inventory for delivery to customers | ** ** | **$**                                   | **9,956**  |   | $ | 24,457 |   |
| Imbalance settlements in-kind (1)           | ** ** | **5,905**                               |       | 4,958 |   |
| Total                                       | ** ** | **$**                                   | **15,861** |   | $ | 29,415 |   |

 

----

(1)          Represents inventory to betransferred to the Company or its customers from LDCs as a result of an excessof natural gas deliveries over amounts used by customers in prior periods.  We anticipate that these inventories will betransferred to the Company or its customers within the upcoming twelve-monthperiod.

 

The volume of natural gasheld in storage decreased 63% from 4.9 million MMBtus at June 30, 2009 to 1.8million MMBtus at June 30, 2010.  Priorto the Restructuring, we managed storage capacity for our natural gasinventory.  During the months of Aprilthrough October, we traditionally purchased natural gas to be held in naturalgas inventory until such inventory was transferred to LDCs for distribution toour customers during the winter months. Natural gas inventories recorded on the consolidated balance sheet atJune 30, 2009 included this activity.  Inconnection with the Commodity Supply Facility, we released a substantialportion of our storage capacity to RBS Sempra during the fiscal year ended June30, 2010.  We enter into physical forwardcontracts to purchase a similar quantity of natural gas from RBS Sempra duringthe winter months, at a cost that will approximate our cost had we retained thatstorage capacity.  As of June 30, 2010,the Company had entered into physical forward contracts to purchaseapproximately 4.3 million MMBtus of natural gas from RBS Sempra.

 

Theweighted-average cost per MMBtu of natural gas held in storage increased 9%from June 30, 2009 to June 30, 2010, which partially offset the impact of lowervolume of natural gas held in storage.

 

***Unrealized Gains and Losses from Risk ManagementActivities, Net***

 

Unrealizedgains and losses from risk management activities recorded on the consolidatedbalance sheets primarily reflect the current market values for commodityderivatives utilized as economic hedges to reduce our exposure to changes inthe prices of natural gas and electricity. Changes in such market value during the term of a derivative contractare recorded as unrealized gains and losses from risk management activities onthe consolidated statements of operations. As derivative contracts expire and related market values are settled,realized gains and losses are recorded on the consolidated statements of operations.

 

Totalunrealized losses from risk management activities included in current andlong-term liabilities decreased to approximately $18.6 million at June 30, 2010from $48.3 million at June 30, 2009. Additionally, on the consolidated

 

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statementsof operations, both realized and unrealized losses from risk managementactivities decreased significantly for fiscal year 2010, as compared with theprior fiscal year.

 

Marketprices for natural gas decreased sharply during fiscal year 2009, whichresulted in lower forward commodity contract prices as compared with theaverage prices on related open hedge contracts for natural gas entered into tomatch customer contracts for future sales of natural gas.  Such changes in market values of derivativeinstruments resulted in significant unrealized losses from risk management activitiesduring fiscal year 2009.  During fiscalyear 2010, we experienced a significantly less volatile market priceenvironment, which resulted in lower unrealized losses from risk managementactivities on our consolidated balance sheets at June 30, 2010, as comparedwith June 30, 2009.

 

***Denham Credit Facility***

 

DenhamCommodity Partners Fund LP (“Denham”) is a significant stockholder of theCompany.  As of June 30, 2009, we hadborrowed the entire available balance under a $12.0 million line of credit fromDenham.  In connection with the Restructuring,the entire balance of the Denham Credit Facility, plus accrued interest, wasrepaid and the Denham Credit Facility was terminated on September 22, 2009.

 

***Bridge Financing Loans***

 

Inconnection with the Revolving Credit Facility, during fiscal year 2009, CharterMx LLC, Denham and four members of our senior management team agreed to providebridge financing in an aggregate amount of $10.4 million (the “Bridge FinancingLoans”).  The Bridge Financing Loan fromCharter Mx LLC was repaid in April 2009. The remaining Bridge Financing Loans were repaid on September 22, 2009,in connection with the Restructuring.

 

***Long-Term Debt***

 

Asof June 30, 2009, we had $165.2 million aggregate principal amount of FloatingRate Notes due 2011 outstanding.  OnSeptember 22, 2009, we consummated an exchange offer pursuant to which weexchanged $158.8 million aggregate principal amount of Floating Rate Notes due2011 for $26.7 million of cash, $67.8 million aggregate principal amount ofFixed Rate Notes due 2014 and 33,940,683 shares of newly authorized Class ACommon Stock.  The Fixed Rate Notes due2014 were issued at a discount of $17.8 million, which was recorded as areduction from the Fixed Rate Notes due 2014 on our consolidated balance sheet,and which will be amortized over the remaining life of the Fixed Rate Notes due2014.

 

Holdersof $6.4 million aggregate principal amount of Floating Rate Notes due 2011 didnot tender their notes pursuant to the Restructuring.  These Floating Rate Notes due 2011 willremain on our consolidated balance sheets until acquired or retired by us oruntil their maturity date in August 2011.

 

***Redeemable Convertible PreferredStock***

 

OnJune 30, 2004, the Company entered into a purchase agreement withPreferred Investors to issue 1,451,310 shares of Preferred Stock at a purchaseprice of $21.36 per share.  As of June30, 2009, the Preferred Stock was recorded at its estimated redemption valueoutside of stockholders’ equity on the consolidated balance sheet because itwas deemed to be redeemable at the option of the Preferred Investors.

 

Inconnection with the Restructuring, on September 22, 2009, all outstandingshares of Preferred Stock were exchanged for 11,862,551 shares of newlyauthorized Class C Common Stock.  Theexcess of the redemption value over the aggregate fair value of common stockissued to the holders of Preferred Stock was recorded as a reduction ofaccumulated deficit on the consolidated balance sheets.

 

***Stockholders’ Equity Activity***

 

Inconnection with the Restructuring, Holdings issued the following shares ofcommon stock:

 

·                  33,940,683 shares of Class A Common Stockwere issued to holders of the Fixed Rate Notes due 2014, which represented62.5% of the aggregate shares of common stock outstanding after theconsummation of the Restructuring.  Theaggregate fair value of Class A Common Stock issued was approximately $82.1million ($0.3 million par value, recorded as Class A Common Stock; and $81.8million recorded as additional paid in capital on the consolidated balance sheets).

 

·                  4,002,290 shares of Class B Common Stock wereissued to RBS Sempra, as a condition to the entry into the agreements governingthe Commodity Supply Facility, which represented 7.37% of the aggregate sharesof common stock outstanding after consummation of the Restructuring.  The aggregate $9.0 million fair value ofClass B

 

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Common Stock issued to RBS Sempra (par value of less than $0.1 million,recorded as Class B Common Stock; and $9.0 million recorded as additional paidin capital on the consolidated balance sheets) was recorded as deferred debtissue costs on the consolidated balance sheets.

 

·                  11,862,551 shares of Class C Common Stockwere issued to holders of Preferred Stock, which represented 21.84% of theaggregate shares of the common stock outstanding after consummation of theRestructuring.  Prior to theRestructuring, the Preferred Stock was recorded at its estimated redemptionvalue of $54.6 million on the consolidated balance sheets.  The aggregate fair value of Class C CommonStock issued to holders of Preferred Stock was $28.7 million ($0.1 million parvalue, recorded as Class C Common Stock; and $28.6 million recorded asadditional paid in capital on the consolidated balance sheets).  The $25.9 million excess of redemption valueof the Preferred Stock over the fair value of Class C Common Stock issued tothe holders of Preferred Stock was recorded as a reduction of accumulateddeficit on the consolidated balance sheets.

 

·                  4,499,588 shares of Class C Common Stock tothe remaining holders of Holdings’ common stock issued and outstanding prior tothe consummation of the Restructuring, which represented 8.29% of the aggregateshares of common stock outstanding after the consummation of theRestructuring.  All 4,681,219 shares ofHoldings’ common stock issued and outstanding prior to the Restructuring wereretired.

 

Inconnection with the Restructuring, the Company incurred approximately $0.3million of legal fees, consulting fees and other costs directly related to theissuance of shares of common stock outlined above, which were recorded as areduction of additional paid in capital.

 

**Results of Operations**

 

***Gross Profit by Business Segment***

 

Grossprofit by business segment is summarized in the following table.  For purposes of this analysis, gross profitincludes fee income and realized losses from risk management activities, butexcludes unrealized gains (losses) from risk management activities.  As the underlying customer contracts are notmarked-to-market, the unrealized gains (losses) from risk management activitiesdo not offer an accurate indication of the ultimate cash impact to the business,as the ultimate cash impact to the business is not determinable until deliveryof the respective commodity under the customer contracts and the associatedrevenue and gain (loss) on risk management activity are realized.

 
| ** **                                                                                | ** ** | ** **                                         | ** **  | ** **                   | ** ** | ** **                   | ** ** | **2010 versus 2009** | ** ** | **2009 versus 2008** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------|-------------|------------------------------|------------|------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                                | ** ** | **Fiscal Year Ended June 30,** | ** **  | **Increase (Decrease)** | ** ** | **Increase (Decrease)** | ** ** |
| **Business Segment**                                                                 | ** ** | **2010**                                           | ** **  | **2009**                     | ** ** | **2008**                     | ** ** | **Amount**                     | ** ** | **%**                          | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                                                                                | ** ** | **($ in thousands)**                     | ** **  |
|                                                                                      |       |                                               |        |                         |       |                         |       |                           |       |                           |       |   |   |   |   |
| Natural Gas                                                                               | ** ** | **$**                                              | **103,294** |                         | $          | 97,968                       |       | $                              | 105,303    |                           | $          | 5,326 |   | 5 |   | $ | (7,335 | ) | (7 | ) |
| Electricity                                                                               | ** ** | **22,767**                                         |        | 22,241                       |       | 10,227                       |       | 526                            |       | 2                              |       | 12,014 |   | 117 |   |
| Total gross profit before unrealized (gains)  losses from risk management activities, net | ** ** | **$**                                              | **126,061** |                         | $          | 120,209                      |       | $                              | 115,530    |                           | $          | 5,852 |   | 5 |   | $ | 4,679 |   | 4 |   |

 

**Fiscal Year Ended June 30, 2010 Versus 2009**

 

***Natural Gas Gross Profit***

 

Overthe course of our fiscal year, natural gas gross profit is impacted by severalfactors, which include but are not limited to:

 

·                  The prices we charge our customers inrelation to the cost of natural gas delivered to our customers;

·                  The volume of natural gas delivered to ourcustomers, which is impacted by the number of customers that we serve, weatherconditions in our markets, economic conditions and other factors that mayaffect customer usage;

·                  Volatility in the market price of natural gasthat we purchase for delivery to our customers; and

·                  Results of our economic hedging policy thatis intended to reduce our financial exposure related to changes in the price ofnatural gas.

 

Significantactivity affecting natural gas gross profit (before unrealized (gains) lossesfrom risk management activities, net) for fiscal years 2010 and 2009 issummarized in the following tables.

 

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| ** **                                                                                                                           | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
| ** **                                                                                                                           | ** ** | **Amount**                                         | ** ** | **Amount per  MMBtu Sold** | ** ** | **Amount** | ** ** | **Amount per  MMBtu Sold** | ** ** |
| ** **                                                                                                                           | ** ** | **(in thousands)**                            | ** ** |
|                                                                                                                                 |       |                                               |       |   |   |   |   |   |   |
| Gross profit (before unrealized gains (losses)  from risk management activities)                                                     |       | $                                                  | 103,294    |   | $ | 2.24 |   | $ | 97,968 |   | $ | 1.79 |   |
| Add (less) the relative cost (benefit) during the  period associated with commodity price volatility and economic hedging  activity: |       |                                               |       |   |   |   |   |   |   |
| Weighted-average cost of gas methodology                                                                                             |       | (1,146                                             | )          | (0.02 | ) | 794 |   | 0.01 |   |
| Realized (gains) losses from risk management  activities associated with natural gas inventory at end of period                      |       | (5,598                                             | )          | (0.12 | ) | 13,203 |   | 0.24 |   |
|                                                                                                                                 |       | 96,550                                             |       | 2.10 |   | 111,965 |   | 2.04 |   |
| Fee income                                                                                                                           |       | (16,883                                            | )          | (0.37 | ) | (20,796 | ) | (0.38 | ) |
| Amount attributable to natural gas delivered to  customers                                                                           |       | $                                                  | 79,667     |   | $ | 1.73 |   | $ | 91,169 |   | $ | 1.66 |   |

 

*Impactof Weighted Average Cost of Gas Inventory Valuation Methodology on Cost ofSales*

 

Ourapplication of weighted average cost accounting to the valuation of natural gasinventory assumes that all purchases of natural gas are initially capitalizedas natural gas inventories in the consolidated balance sheet.  The resulting weighted average cost per MMBtuis then utilized to calculate the cost of natural gas subsequently sold.  As a result, when the price per MMBtu ofnatural gas purchased during a reporting period is less than the weightedaverage cost per MMBtu of storage inventory at the beginning of the period, theweighted average cost per unit of storage inventory will be lower at the end ofthe period than at the beginning of the period. The reduction in inventory value per MMBtu deferred in the balance sheetbetween the beginning and end of an operating period is reflected as anincrease in cost of natural gas sold in the consolidated statement ofoperations for the period.

 

Conversely,for reporting periods during which natural gas prices per MMBtu are greaterduring the period than the weighted average cost of storage inventory at thebeginning of that period, the weighted average cost per unit of storageinventory will be higher at the end of the period than at the beginning of theperiod, resulting in lower cost of natural gas inventory sold for that period.

 

Theimpacts described above on the weighted average cost of gas are more pronouncedin periods where we inject storage gas and have an increase in storage volumefrom the beginning to the end of the period. Offsetting net increases or decreases in gross profit are generallyrealized in future periods as these inventories are sold.

 

*RealizedGains and Losses from Risk Management Activities, Net, Associated With NaturalGas Inventories Not Yet Sold*

 

Sincewe do not perform hedge accounting, realized (gains) losses from riskmanagement activities, net includes net gains and losses related to thesettlement of risk management activities associated with natural gasinventories not yet sold.  Offsetting netincreases or decreases in gross profit are generally realized in futureperiods, between November and March, as these inventories are sold.

 

*FeeIncome*

 

Feeincome decreased $3.9 million (19%) during fiscal year 2010, as compared withthe prior fiscal year, due primarily to a reduction in the number of customersserved in markets where we are responsible for billing, and lowercredit-related fees due to improved credit quality of the overall customerportfolio.

 

*GrossProfit Attributable to Natural Gas Delivered to Customers*

 

Ourparticipation in the SSO Program, which began on April 1, 2010, resulted in aminimal impact on natural gas gross profit from its inception through June 30,2010.   Excluding the impact of the SSOProgram, our gross profit for natural gas sold to customers would have been$1.80 per MMBtu for fiscal year 2010.

 

Lowergross profit attributable to natural gas delivered to customers was dueprimarily to a 19% reduction in the volumes of natural gas sold to customers,which was partially offset by a 4% increase in gross profit per MMBtu ofnatural gas delivered to customers. Lower volumes delivered to customers were due to a lower number ofcustomers served.  Higher gross profitper MMBtu sold was due to colder-than-normal weather and a favorable pricingenvironment in many of our natural gas markets. During fiscal year 2010, as weather-related demand increased, naturalgas commodity prices remained uncharacteristically low.  This allowed us to realize higher than normalgross profit, particularly on the incremental volumes

 

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ofnatural gas delivered to customers during the winter.

 

**Electricity Gross Profit**

 

Electricitygross profit was 2% higher for fiscal year 2010, as compared with the prioryear.  An 11% increase in the volume ofMWhrs sold to customers, which was driven by higher average RCEs for fiscalyear 2010, was partially offset by an 8% reduction in gross profit per MWhrsold during the period, which resulted from competitive pricing environments inmany of our electricity markets, including our new market in Pennsylvania.

 

**Fiscal Year Ended June 30, 2009 Versus 2008**

 

***Natural Gas Gross Profit***

*** ***
| ** **                                                                                                                           | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| ** **                                                                                                                           | ** ** | ** **                                         | ** ** | **Amount per** | ** ** | ** ** | ** ** | **Amount per** | ** ** |
| ** **                                                                                                                           | ** ** | **Amount**                                         | ** ** | **MMBtu Sold** | ** ** | **Amount** | ** ** | **MMBtu Sold** | ** ** |
|                                                                                                                                 |       | **(in thousands)**                            |       |
|                                                                                                                                 |       |                                               |       |   |   |   |   |   |   |
| Gross profit (before unrealized gains (losses)  from risk management activities)                                                     |       | $                                                  | 97,968     |   | $ | 1.79 |   | $ | 105,303 |   | $ | 1.94 |   |
| Add (less) the relative cost (benefit) during the  period associated with commodity price volatility and economic hedging  activity: |       |                                               |       |   |   |   |   |   |   |
| Weighted-average cost of gas methodology                                                                                             |       | 794                                                |       | 0.01 |   | (1,376 | ) | (0.03 | ) |
| Realized (gains) losses from risk management  activities associated with natural gas inventory at end of period                      |       | 13,203                                             |       | 0.24 |   | (4,826 | ) | (0.09 | ) |
|                                                                                                                                 |       | 111,965                                            |       | 2.04 |   | 99,101 |   | 1.82 |   |
| Fee income                                                                                                                           |       | (20,796                                            | )          | (0.38 | ) | (18,833 | ) | (0.35 | ) |
| Amount attributable to natural gas delivered to  customers                                                                           |       | $                                                  | 91,169     |   | $ | 1.66 |   | $ | 80,268 |   | $ | 1.47 |   |

 

*FeeIncome*

 

Ourgross margin includes fee income charged to customers, primarily in our Georgianatural gas market, for monthly service, late payment and shut-off/reconnectservice.  Fee income was $2.0 millionhigher for fiscal year 2009, as compared with the prior fiscal year, dueprimarily to increased late payment and service termination fees in thesemarkets.

 

*GrossProfit Attributable to Natural Gas Delivered to Customers*

 

Thevolume of natural gas MMBtus sold was approximately 1% higher for fiscal year2009, as compared with the same period in the prior fiscal year.  Lower average RCEs were offset by higherheating degree days during fiscal year 2009. Higher volumes of natural gas sold resulted in higher natural gas grossprofit of approximately $0.7 million for fiscal year 2009, as compared with theprior fiscal year.

 

Thenet impacts described above were partially offset by higher gross profit perMMBtu sold resulting from a favorable pricing environment in many of ourmarkets, particularly for our variable price accounts.

 

***Electricity Gross Profit***

 

Higherelectricity sales and gross profit were primarily driven by higher averageelectricity RCEs, which increased 28% during fiscal year 2009, as compared withthe prior fiscal year, resulting in significantly higher volume of MWhrssold.  The main driver for higher averageRCEs was significant organic customer growth in our Texas, Connecticut and NewYork market areas, which was largely due to targeted direct sales marketingactivities during fiscal year 2008 and the first three months of fiscal year2009 and a wider range of products offered to customers.  Higher gross profit per MWhr sold alsocontributed to the overall increase in electricity gross profit.

 

***Operating Expenses***

 

Operatingexpenses are summarized in the following table.

 

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|                                |       |                                               |       |                           |       |                           |       | **2010 versus 2009** |       | **2009 versus 2008** |       |
|-------------------------------------|------------|----------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
|                                |       | **Fiscal Year Ended June 30,** |       | **Increase********(Decrease)** |       | **Increase********(Decrease)** |       |
|                                |       | **2010**                                           | ** ** | **2009**                       | ** ** | **2008**                       | ** ** | **Amount**                     | ** ** | **%**                          | ** ** | **Amount** | ** ** | **%** |   |
|                                |       | **($ in thousands)**                     |       |
|                                |       |                                               |       |                           |       |                           |       |                           |       |                           |       |   |   |   |   |
| General and administrative expenses |       | $                                                  | **58,603** |                           | $          | 59,957                         |       | $                              | 62,271     |                           | $          | (1,354 | ) | (2 | ) | $ | (2,314 | ) | (4 | ) |
| Advertising and marketing expenses  | ** ** | **3,749**                                          |       | 2,117                          |       | 4,546                          |       | 1,632                          |       | 77                             |       | (2,429 | ) | (53 | ) |
| Reserves and discounts              | ** ** | **7,495**                                          |       | 15,130                         |       | 7,130                          |       | (7,635                         | )          | (50                            | )          | 8,000 |   | 112 |   |
| Depreciation and amortization       | ** ** | **22,174**                                         |       | 37,575                         |       | 32,698                         |       | (15,401                        | )          | (41                            | )          | 4,877 |   | 15 |   |
| Total operating expenses            |       | $                                                  | **92,021** |                           | $          | 114,779                        |       | $                              | 106,645    |                           | $          | (22,758 | ) | (20 | ) | $ | 8,134 |   | 8 |   |

 

**General and Administrative Expenses**

 

Generaland administrative expenses are summarized in the following table.

 
|                                      |       |                                               |       |                           |       |                           |       | **2010 versus 2009** | ** ** | **2009versus 2008** |       |
|-------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------|------------|
|                                      |       | **Fiscal Year Ended June 30,** |       | **Increase********(Decrease)** | ** ** | **Increase********(Decrease)** |       |
|                                      |       | **2010**                                           | ** ** | **2009**                       | ** ** | **2008**                       | ** ** | **Amount**                     | ** ** | **%**                    | ** ** | **Amount** | ** ** | **%** |   |
|                                      |       | **($ in thousands)**                     |       |
| Salaries and employee benefits            |       | $                                                  | **36,648** |                           | $          | 33,644                         |       | $                              | 36,007     |                     | $          | 3,004 |   | 9 |   | $ | (2,363 | ) | (7 | ) |
| Professional fees                         | ** ** | **6,391**                                          |       | 7,998                          |       | 9,360                          |       | (1,607                         | )          | (20                      | )          | (1,362 | ) | (15 | ) |
| Other general and administrative expenses | ** ** | **15,564**                                         |       | 18,315                         |       | 16,904                         |       | (2,751                         | )          | (15                      | )          | 1,411 |   | 8 |   |
| Total general and administrative expenses |       | $                                                  | **58,603** |                           | $          | 59,957                         |       | $                              | 62,271     |                     | $          | (1,354 | ) | (2 | ) | $ | (2,314 | ) | (4 | ) |

 

***Fiscal Year Ended June 30, 2010 versus 2009***

 

Inconnection with the Restructuring, we recorded approximately $2.2 million ofnon-recurring general and administrative expenses during fiscal year 2010,including:

 

·                  $0.8 million of bonuses, included in salariesand employee benefits, which were paid to management in connection with theconsummation of the Restructuring;

·                  $0.2 million of severance costs, included insalaries and employee benefits, which related to certain employees terminatedin September 2009 as part of an initiative to streamline ourorganizational structure and control operating costs; and

·                  $1.2 million of professional fees incurred inconnection with various potential liquidity events considered during fiscalyear 2009 and the first three months of fiscal year 2010.

 

Salariesand employee benefits for fiscal year 2010 also includes the followingnon-recurring activity:

 

·                  In May 2010, we incurred $1.3 million ofseverance costs when our Executive Vice President left the Company; and

·                  Also in May 2010, we amended theemployment agreement and entered into a relocation agreement with our ExecutiveVice President and Chief Financial Officer, which resulted in additionalcompensation cost of $0.9 million during fiscal year 2010.

 

Excludingthese incremental costs, salaries and employee benefits, expenses were slightlylower for fiscal year 2010, as compared with the prior fiscal year, primarilyas a result of a reduced number of employees.

 

Excludingthe incremental costs described above, lower professional fees for fiscal year2010 were primarily due to termination of management consulting agreements inconnection with the Restructuring, and, lower consulting fees associated withcompliance with the requirements of the Sarbanes-Oxley Act of 2002.

 

Lowerother general and administrative expenses during the fiscal year 2010 wereprimarily due to lower customer care and billing related expenses as a resultof generally lower numbers of customers served in our natural gas businesssegment.

 

***Fiscal Year Ended June 30, 2009 Versus 2008***

 

Throughoutfiscal year 2008, we incurred significant incremental general andadministrative expenses related to initiatives to enhance our corporatefinance, billing, accounting operations, customer service, informationtechnology, marketing and supply functions in support of business growth.  In addition, we increased our staff count andincurred other incremental 

 

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coststo enhance our overall internal control environment, including our informationtechnology and financial reporting controls, and to develop a formal internalaudit function.  A portion of theseincremental contracted services and other incremental costs in fiscal year 2008have not recurred during fiscal year 2009, resulting in generally lower generaland administrative expenses.

 

InMarch 2008, the Compensation Committee of our Board of Directors approvedthe issuance of 19,000 total shares of common stock to two of our seniorexecutives.  Total compensation expenserelated to issuance of these shares was approximately $1.7 million, whichincluded the fair value of the common stock issued and additional compensationto offset the taxable nature of the shares to the employees.  Excluding the impact of the compensationexpense from issuance of these shares in fiscal year 2008, salaries andemployee benefits decreased $0.7 million (2%) during fiscal year 2009, ascompared with the prior fiscal year. Salaries and employee benefits include the cost of contracted servicesto supplement our employees in certain departments.  Lower salaries and related expenses duringfiscal year 2009 are primarily due to lower contracted services costs.

 

Higherother general and administrative expenses during fiscal year 2009 wereprimarily due to generally higher customer care and billing related expenses.

 

**Advertising and Marketing Expenses**

 

***Fiscal Year Ended June 30, 2010 versus 2009***

 

Higheradvertising and marketing expenses for fiscal year 2010, as compared with theprior fiscal year, reflects our return to a more normal marketing environmentsubsequent to the Restructuring.  As partof an overall corporate strategy to manage our liquidity position, and inresponse to amendments to the Revolving Credit Facility and Hedge Facility thatplaced limitations on amounts that we could spend on marketing activities andon the products we could offer to our customers, we curtailed our level ofsales and marketing activity, resulting in significantly lower advertising andmarketing expenses during the second half of fiscal year 2009 and the firstthree months of fiscal year 2010.

 

Asa result of the Restructuring, we now have the ability to market a widervariety of products to current and potential customers using our traditionalmarketing channels.  During the last ninemonths of fiscal year 2009, we implemented various elements of our fiscal year2010 growth and marketing plan, which included strategic marketing initiativesin our current markets as well as incremental marketing expenses related to newmarkets, particularly a new electricity market in Pennsylvania.

 

***Fiscal Year Ended June 30, 2009 Versus 2008***

 

Aspart of an overall corporate strategy to manage our liquidity position, and inresponse to amendments to our Revolving Credit Facility and Hedge Facility thatplaced limitations on amounts that we could spend on marketing activities andon the products we could offer to our customers, we intentionally curtailed ourlevel of sales and marketing activity, resulting in significantly loweradvertising and marketing expenses during fiscal year 2009, as compared withprior fiscal year.

 

**Reserves and Discounts**

 

Reservesand discounts are summarized in the following table.

 
| ** **                                                                    | ** ** | ** **                                         | ** ** | ** **                     | ** ** | ** **                     | ** ** | **2010 versus 2009** | ** ** | **2009 versus 2008** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                    | ** ** | **Fiscal Year Ended June 30,** | ** ** | **Increase********(Decrease)** | ** ** | **Increase********(Decrease)** | ** ** |
| ** **                                                                    | ** ** | **2010**                                           | ** ** | **2009**                       | ** ** | **2008**                       | ** ** | **Amount**                     | ** ** | **%**                          | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                                                                    | ** ** | **($ in thousands)**                     | ** ** |
|                                                                          |       |                                               |       |                           |       |                           |       |                           |       |                           |       |   |   |   |   |
| Provision for doubtful accounts                                               |       | $                                                  | **5,164**  |                           | $          | 12,009                         |       | $                              | 5,050      |                           | $          | (6,845 | ) | (57 | ) | $ | 6,959 |   | 138 |   |
| Contractual discounts for LDC guarantees of  customer accounts receivable (1) | ** ** | **2,331**                                          |       | 3,121                          |       | 2,080                          |       | (790                           | )          | (25                            | )          | 1,041 |   | 50 |   |
| Total reserves and discounts                                                  |       | $                                                  | **7,495**  |                           | $          | 15,130                         |       | $                              | 7,130      |                           | $          | (7,635 | ) | (50 | ) | $ | 8,000 |   | 112 |   |

 

----

(1)      By agreement, certain LDCsguarantee the collection of customer accounts receivable.  Contractual discounts charged by various LDCsaverage approximately 1% of collections, which is effectively the cost toguarantee the customer accounts receivable.

 

***Fiscal Year Ended June 30, 2010 versus 2009***

 

Thelower provision for doubtful accounts during fiscal year 2010 was primarily dueto the following factors:

 

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·                  Sales of natural gas and electricity inmarkets where customer accounts receivable are not guaranteed by LDCs decreased33% during fiscal year 2010, as compared with the same period in the priorfiscal year;

·                  The aging of our customer accounts receivabledeteriorated in certain of our larger markets in Georgia, Texas and the northeasternU.S. during fiscal year 2009, which resulted in charge-offs of customeraccounts receivable and provisions for doubtful accounts for those markets thatwere higher than our historical levels. Credit environments have generally stabilized in our markets duringfiscal year 2010;

·                  Our acquisition of Catalyst Natural Gas, LLCin October 2008 resulted in higher reserves against customer accountsreceivable deemed uncollectible and incremental charge-offs of customeraccounts receivable, which contributed to a higher provision for doubtfulaccounts in our Georgia natural gas market during fiscal year 2009 and thefirst quarter of fiscal year 2010.  Therewere no purchase acquisitions of customer accounts during fiscal year 2010 thatresulted in incremental charge-offs or provisions for doubtful accounts; and

·                  During fiscal year 2009, we initiated morestringent credit standards for our new and existing customers, which resultedin generally higher credit quality in our customer portfolio during fiscal year2010.

 

Wecontinuously monitor economic conditions and collections experience in ourmarkets in order to assess appropriate levels of our allowance for doubtfulaccounts.  Refer to Item 7A of thisAnnual Report for additional commentary regarding our management of creditrisk.

 

Lowercontractual discounts for LDC guarantees of customer accounts receivable duringfiscal year 2010 were due to generally lower sales of natural gas andelectricity within our LDC-guaranteed markets. The weighted-average contractual discount rates for fiscal year 2010were comparable to the rates for the same periods in the prior fiscal year.

 

***Fiscal Year Ended June 30, 2009 Versus 2008***

 

Accountsreceivable includes cash imbalance settlements that represent the value ofexcess natural gas delivered to LDCs for consumption by our customers andactual customer usage.   Historically, wehave collected 100% of these imbalance settlement receivables.  However, as a result of a bankruptcy filingby a retail marketer in Georgia in October 2008, the collection of ourimbalance receivable position in Georgia was placed at risk.  A preliminary settlement proposal offered in March 2009for resolution of the imbalance receivable resulted in us recording anincremental provision for bad debt expense of approximately $0.6 million duringfiscal year 2009.

 

Excludingthe impact of the Georgia imbalance settlement, the higher provision fordoubtful accounts for fiscal year 2009 was primarily due to:

 

·                  higher revenue during fiscal year 2009 in ourlargest non-guaranteed natural gas market in Georgia and in our non-guaranteedelectricity market in Texas.  Total salesof natural gas and electricity for these markets increased a combined 7% duringfiscal year 2009; and

·                  general deterioration in the aging ofcustomer accounts receivable and higher charge off experience in certainmarkets, including Georgia and Texas. The deterioration in Georgia was primarily related to collections activityrelated to customers acquired from Catalyst Natural Gas, LLC in October 2008.

 

Wecontinue to monitor economic conditions and collections experience in ourmarkets in order to assess appropriate levels of our allowance for doubtfulaccounts.

 

Highercontractual discounts for LDC guarantees of customer accounts receivable duringfiscal year 2009, as compared with the prior fiscal year, are due to generallyhigher sales of natural gas and electricity within our LDC guaranteed marketsand to a higher weighted-average contractual discount rate.  Total revenues within these markets decreasedapproximately 28% during fiscal year 2009, as compared to the prior fiscalyear, primarily due to overall organic growth within these markets.  The weighted-average contractual discount ratecharged by LDCs also increased by approximately 37%, primarily due to changesin customer market concentrations and increases in the discount rates requiredby LDCs in certain markets.

 

**Depreciation and Amortization**

 

Depreciationand amortization expenses are summarized in the following table.

 

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| ** **                                 | ** ** | ** **                                         | ** ** | ** **                     | ** ** | ** **                     | ** ** | **2010 versus 2009** | ** ** | **2009versus 2008** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                                 | ** ** | **Fiscal Year Ended June 30,** | ** ** | **Increase********(Decrease)** | ** ** | **Increase********(Decrease)** | ** ** |
| ** **                                 | ** ** | **2010**                                           | ** ** | **2009**                       | ** ** | **2008**                       | ** ** | **Amount**                     | ** ** | **%**                    | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                                 | ** ** | **($ in thousands)**                     | ** ** |
|                                       |       |                                               |       |                           |       |                           |       |                           |       |                     |       |   |   |   |   |
| Depreciation of fixed assets               |       | $                                                  | **2,358**  |                           | $          | 7,787                          |       | $                              | 9,274      |                     | $          | (5,429 | ) | (70 | ) | $ | (1487 | ) | (16 | ) |
| Amortization of customer acquisition costs | ** ** | **19,814**                                         |       | 29,777                         |       | 23,414                         |       | (9,963                         | )          | (33                      | )          | 6,363 |   | 27 |   |
| Other amortization expense                 | ** ** | **2**                                              |       | 11                             |       | 10                             |       | (9                             | )          | (82                      | )          | 1 |   | 10 |   |
| Total depreciation and amortization        |       | $                                                  | **22,174** |                           | $          | 37,575                         |       | $                              | 32,698     |                     | $          | (15,401 | ) | (41 | ) | $ | 4,877 |   | 15 |   |

 

***Fiscal Year Ended June 30, 2010 versus 2009***

 

Inconnection with our purchase of SESCo in August 2006, we acquiredsoftware, fixed assets and customer contracts, the aggregate cost of which wasdepreciated or amortized over a three-year period.  Lower depreciation and amortization expensesduring fiscal year 2010 was primarily due to these acquired assets being fullydepreciated or amortized as of August 2009.

 

***Fiscal Year Ended June 30, 2009 Versus 2008***

 

Duringfiscal year 2008, we shifted our marketing focus and resources towards directsales and marketing activities.  Much ofthe cost associated with these direct marketing channels during fiscal years2009 and 2008 were deferred as customer acquisition costs on our consolidatedbalance sheet and are being amortized over a three-year estimated benefitperiod.  Higher amortization expense forfiscal year 2009 was primarily due to these higher deferrals of directmarketing costs.

 

***Interest Expense, net***

 

Interestexpense is summarized in the following table.

 
| ** **                                                                 | ** ** | ** **                                         | ** ** | ** **                     | ** ** | ** **                     | ** ** | **2010 versus 2009** | ** ** | **2009 versus 2008** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                 | ** ** | **Fiscal Year Ended June 30,** | ** ** | **Increase********(Decrease)** | ** ** | **Increase********(Decrease)** | ** ** |
| ** **                                                                 | ** ** | **2010**                                           | ** ** | **2009**                       | ** ** | **2008**                       | ** ** | **Amount**                     | ** ** | **%**                          | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                                                                 | ** ** | **($ in thousands)**                     | ** ** |
|                                                                       |       |                                               |       |                           |       |                           |       |                           |       |                           |       |   |   |   |   |
| Interest related to debt instruments:                                      |       |                                               |       |                           |       |                           |       |                           |       |                           |       |   |   |   |   |
| Floating Rate Notes due 2011                                               |       | $                                                  | **3,678**  |                           | $          | 16,834                         |       | $                              | 20,983     |                           | $          | (13,156 | ) | (78 | ) | $ | (4,149 | ) | (20 | ) |
| Fixed Rate Notes due 2014                                                  | ** ** | **6,850**                                          |       | —                         |       | —                         |       | 6,850                          |       | 100                            |       | — |   | — |   |
| Denham Credit Facility                                                     | ** ** | **246**                                            |       | 813                            |       | 528                            |       | (567                           | )          | (70                            | )          | 285 |   | 54 |   |
|                                                                       |       |                                               |       |                           |       |                           |       |                           |       |                           |       |   |   |   |   |
| Interest and fees related to supply and hedging  facilities:               |       |                                               |       |                           |       |                           |       |                           |       |                           |       |   |   |   |   |
| Commodity Supply Facility                                                  | ** ** | **7,610**                                          |       | —                         |       | —                         |       | 7,610                          |       | 100                            |       | — |   | — |   |
| Revolving Credit Facility                                                  | ** ** | **1,185**                                          |       | 7,809                          |       | 3,021                          |       | (6,624                         | )          | (85                            | )          | 4,788 |   | 158 |   |
| Hedge Facility                                                             | ** ** | **1,788**                                          |       | 4,133                          |       | 2,906                          |       | (2,345                         | )          | (57                            | )          | 1,227 |   | 42 |   |
|                                                                       |       |                                               |       |                           |       |                           |       |                           |       |                           |       |   |   |   |   |
| Change in value of interest rate swaps (1)                                 | ** ** | **2,095**                                          |       | 4,999                          |       | 4,963                          |       | (2,904                         | )          | (58                            | )          | 36 |   | 1 |   |
| Amortization of deferred financing costs and  original debt issue discount | ** ** | **11,608**                                         |       | 10,332                         |       | 5,345                          |       | 1,276                          |       | 12                             |       | 4,987 |   | 93 |   |
| Other                                                                      | ** ** | **193**                                            |       | 815                            |       | 165                            |       | (622                           | )          | (76                            | )          | 650 |   | 394 |   |
| Total interest expense                                                     | ** ** | **35,253**                                         |       | 45,735                         |       | 37,911                         |       | (10,482                        | )          | (23                            | )          | 7,824 |   | 21 |   |
| Less: interest income                                                      | ** ** | **(271**                                           | )          | (430                           | )          | (3,806                         | )          | 159                            |       | (37                            | )          | 3,376 |   | (89 | ) |
| Interest expense, net                                                      |       | $                                                  | **34,982** |                           | $          | 45,305                         |       | $                              | 34,105     |                           | $          | (10,323 | ) | (23 | ) | $ | 11,200 |   | 33 |   |

 

----

(1)      Includes mark-to-marketadjustments and interest expense associated with interest rate swap agreementsutilized to manage exposure to interest rate fluctuations related to theFloating Rate Senior Notes due 2011 and the Commodity Supply Facility.

 

**Fiscal Year Ended June 30, 2010 versus 2009**

 

***Interest Related to Debt Instruments***

 

Lowertotal interest expense associated with debt instruments for fiscal year 2010 isprimarily due to decreased total debt balances resulting from theRestructuring.  The total aggregateprincipal balance outstanding under debt instruments decreased fromapproximately $177.2 million prior to the Restructuring to $74.2 million afterthe Restructuring.

 

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Lowerinterest expense associated with the Floating Rate Notes due 2011 for fiscalyear 2010 was due to a combination of lower debt balances and lower interestrates.  As a result of the Restructuring,the average aggregate outstanding principal balance of Floating Rate Notes due2011 decreased to approximately $42.5 million for fiscal year 2010, from $165.2million for the prior fiscal year.  Theweighted-average interest rate for the Floating Rate Notes due 2011 alsodecreased to 8.26% for fiscal year 2010 from 10.02% for the prior fiscal year.

 

The$67.8 million aggregate principal amount of Fixed Rate Notes due 2014 issued inconnection with the Restructuring bears interest at 13.25%, which is higherthan the average interest rates on outstanding debt instruments prior to theRestructuring.  The higher interest rateon the Floating Rate Notes due 2014 partially offset the impact of loweraverage debt balances for fiscal year 2010.

 

***Interest and Fees Related to Supply and HedgingFacilities***

 

Inconnection with the Restructuring, the Commodity Supply Facility replaced theRevolving Credit Facility and Hedge Facility effective September 22,2009.  During the three months ended September 30,2009, we incurred significant fees related to extension and winding down of theHedge Facility and Revolving Credit Facility prior to the Restructuring.  Excluding these incremental fees, feesassociated with our supply and hedging activities are generally lower under theCommodity Supply Facility than those under the former Revolving Credit Facilityand Hedge Facility.

 

***Amortization of Deferred Financing Costs andOriginal Debt Issue Discount***

 

Higheramortization of deferred debt issue costs and original issue discount duringfiscal year 2010 was due to the net impact of the following activity:

 

·                  In connection with the Restructuring, wedeferred approximately $16.0 million of costs related to the Commodity SupplyFacility and the Fixed Rate Notes due 2014, including cash expenditures ofapproximately $7.0 million and the aggregate $9.0 million fair value of Class BCommon Stock issued to RBS Sempra in a non-cash transaction as a condition tothe entry into the ISDA Master Agreements. Amortization of these costs resulted in $3.7 million of incrementalinterest expense during fiscal year 2010.

 

·                  In connection with the Restructuring,approximately $158.8 million aggregate principal amount of Floating Rate Notesdue 2011 was exchanged for cash, Fixed Rate Notes due 2014 and Class ACommon Stock.   As a result, we recordedincremental interest expense of $3.1 million during fiscal year 2010, whichrepresents accelerated amortization equivalent to a pro rata portion of theoriginal issue discount and deferred debt issue costs associated with theFloating Rate Notes due 2011 that were exchanged in connection with theRestructuring.

 

·                  During fiscal year 2009 and the first threemonths of fiscal year 2010, we negotiated several amendments to our HedgeFacility and our Revolving Credit Facility. Approximately $9.1 million of total fees associated with theseamendments were deferred during fiscal year 2009 and the first three months offiscal year 2010, which were amortized through the September 21, 2009maturity date of the Revolving Credit Facility and Hedge Facility.  Incremental interest expense associated withamortization of these costs was approximately $1.6 million for fiscal year 2010versus $7.5 million for fiscal year 2009.

 

**Fiscal Year Ended June 30, 2009 Versus 2008**

 

Lowerinterest accrued on the Floating Rate Notes due 2011 was primarily due to alower average interest rate, which decreased to 10.02% for fiscal year 2009from 11.95% for fiscal year 2008.  Theaverage aggregate balance of Floating Rate Notes due 2011 outstanding alsodecreased to $165.2****million forfiscal year 2009, as compared to $172.4 million for fiscal year 2008, as aresult of our purchases of Floating Rate Notes due 2011 during fiscal year2008.

 

Higherinterest and fees related to the Revolving Credit Facility were due to thefollowing activity:

 

·                  higher interest and fees associated withoutstanding obligations under the Revolving Credit Facility, partially due toan increase of approximately 20% in the average balance of cash advances andletters of credit outstanding, and partially due to generally higher letter ofcredit fees resulting from amendments to the agreement that governed theRevolving Credit Facility during fiscal year 2009; and

 

·                  the Bridge Financing Loans from certainshareholders and members of senior management, as required by amendments to theagreement that governed the Revolving Credit Facility, which resulted inapproximately $2.7 million of incremental interest expense for fiscal year2009.

 

Duringfiscal year 2009, we negotiated several amendments to our Hedge Facility andour Revolving Credit Facility. Approximately $8.7 million of fees associated with these amendments weredeferred during fiscal year 2009 for amortization 

 

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overthe remaining amended term of the facilities. Incremental interest expense of $7.5 million for fiscal year 2009 was adirect result of amortization of these deferred costs.

 

Lowerinterest income was a direct result of lower average cash and cash equivalentsand restricted cash balances during fiscal year 2009 as well as a lower averageinterest rate earned during the year, as compared to the same period in fiscalyear 2008.

 

***Income Tax (Expense) Benefit***

 

**Fiscal Year Ended June 30, 2010 versus 2009**

 

Oureffective tax rate was a charge of 56.1% and a benefit of 21.4% for fiscal year2010 and 2009, respectively.   The highereffective tax rate for fiscal year 2010, as compared to fiscal year 2009, wasprimarily due to recognition of an additional valuation allowance for deferredincome tax assets at June 30, 2010, which resulted from a change in themix of deferred tax assets.

 

Thesignificant components of the Company’s deferred tax assets and liabilities aresummarized in the following table.

 
| ** **                                             | ** ** | **Balance at June 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                | ** ** |
| **Deferred tax assets:**                               |       |                                   |       |   |   |
| Depreciation and amortization                          | ** ** | **$**                                  | **18,751** |   | $ | 18,982 |   |
| Net unrealized losses from risk management  activities | ** ** | **3,197**                              |       | 18,693 |   |
| Allowance for doubtful accounts                        | ** ** | **1,992**                              |       | 2,860 |   |
| Tax loss carryforwards                                 | ** ** | **3,652**                              |       | 2,724 |   |
| Accrued bonuses                                        | ** ** | **1,540**                              |       | 1,707 |   |
| Stock compensation expense                             | ** ** | **901**                                |       | 1,642 |   |
| Novation of interest rate swaps                        | ** ** | **2,996**                              |       | — |   |
| Other reserves                                         | ** ** | **133**                                |       | 165 |   |
| Valuation allowance                                    | ** ** | **(28,123**                            | **)**      | (22,664 | ) |
| Total deferred tax assets                              | ** ** | **5,039**                              |       | 24,109 |   |
| **Deferred tax liabilities:**                          | ** ** | ** **                             |       |   |   |
| State tax liability                                    | ** ** | **32**                                 |       | — |   |
| Total deferred tax liabilities                         | ** ** | **32**                                 |       | — |   |
| Net deferred tax asset                                 | ** ** | **$**                                  | **5,007**  |   | $ | 24,109 |   |
|                                                   |       |                                   |       |   |   |
| **Balance sheet classification:**                      | ** ** | ** **                             |       |   |   |
| Current deferred tax asset                             | ** ** | **$**                                  | **1,378**  |   | $ | 9,020 |   |
| Long-term deferred tax asset                           | ** ** | **3,629**                              |       | 15,089 |   |
| Current deferred tax liability                         | ** ** | **—**                             |       | — |   |
| Net deferred tax asset                                 | ** ** | **$**                                  | **5,007**  |   | $ | 24,109 |   |

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amount of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Our policy is to establish a valuation allowance if it is “more likelythan not” that the related tax benefits will not be realized.

 

Wehave deferred tax assets related to unrealized losses from risk managementactivities.  We anticipate that thesedeferred tax assets will be realized in future periods when sales of fixedprice commodities, to which the unrealized losses from risk managementactivities relate, occur.  Therefore, wedid not establish a valuation allowance for these deferred tax assets.

 

Forthe remaining deferred tax assets, we determined based on available evidence,including historical financial results for the last three years, that it is “morelikely than not” that a portion of these items may not be recoverable in thefuture.  We increased the valuationallowance associated with our U.S. operations by $5.5 million, due to a changein the mix of related deferred tax assets, resulting in a charge to tax expensefor fiscal year 2010.

 

**Fiscal Year Ended June 30, 2009 Versus 2008**

 

Oureffective tax rate was a tax benefit of 21.4% and tax expense of 40.9% forfiscal years 2009 and 2008, respectively. The change in the effective tax rate was primarily due to the impact ofa valuation allowance recorded at June 30, 2009 against deferred taxassets, as described below, and changes in the mix and amounts of permanentdifferences and to a lower state statutory tax rate as a result of incomeapportionment for the states in which we do business.

 

Thesignificant components of the Company’s deferred tax assets and liabilities aresummarized in the following table.

 

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| ** **                                             | ** ** | **Balance at June 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                | ** ** |
| **Deferred tax assets:**                               |       |                                   |       |   |   |
| Depreciation and amortization                          | ** ** | **$**                                  | **18,982** |   | $ | 12,877 |   |
| Net unrealized losses from risk management  activities | ** ** | **18,693**                             |       | — |   |
| Allowance for doubtful accounts                        | ** ** | **2,860**                              |       | 2,035 |   |
| Tax loss carryforwards                                 | ** ** | **2,724**                              |       | — |   |
| Accrued bonuses                                        | ** ** | **1,707**                              |       | 1,090 |   |
| Stock compensation expense                             | ** ** | **1,642**                              |       | 1,664 |   |
| Other reserves                                         | ** ** | **165**                                |       | 122 |   |
| Valuation allowance                                    | ** ** | **(22,664**                            | )          | — |   |
| Total deferred tax assets                              | ** ** | **24,109**                             |       | 17,788 |   |
| **Deferred tax liabilities:**                          |       |                                   |       |   |   |
| Net unrealized gains from risk management  activities  |       | —                                 |       | (17,085 | ) |
| Total deferred tax liabilities                         |       | —                                 |       | (17,085 | ) |
| Net deferred tax asset                                 | ** ** | **$**                                  | **24,109** |   | $ | 703 |   |
|                                                   |       |                                   |       |   |   |
| **Balance sheet classification:**                      |       |                                   |       |   |   |
| Current deferred tax asset                             | ** ** | **$**                                  | **9,020**  |   | $ | — |   |
| Long-term deferred tax asset                           | ** ** | **15,089**                             |       | 10,503 |   |
| Current deferred tax liability                         |       | —                                 |       | (9,800 | ) |
| Net deferred tax asset                                 | ** ** | **$**                                  | **24,109** |   | $ | 703 |   |

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amount of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Our policy is to establish a valuation allowance if it is “more likelythan not” that the related tax benefits will not be realized.

 

Wehave deferred tax assets related to unrealized losses from risk managementactivities.  We anticipate that thesedeferred tax assets will be realized in future periods when sales of fixedprice commodities, to which the unrealized losses from risk managementactivities relate, occur.  Therefore, wedid not establish a valuation allowance for these deferred tax assets.  For the remaining deferred tax assetsreflected in the table above, we determined based on available evidenceincluding historical financial results for the last three years, that it is “morelikely than not” that a portion of these items may not be recoverable in thefuture.

 

**Liquidity and Capital Resources**

 

Ourprincipal sources of liquidity for our ongoing operations are cash collectedfrom sales of natural gas and electricity to customers and borrowings under ourcredit facilities.   Our primaryliquidity requirements arise primarily from our seasonal working capital needs,including purchases of natural gas inventories, collateral requirements relatedto supplier, LDC, transportation and storage arrangements, acquisition ofcustomers and debt service obligations. Because we sell natural gas and electricity, we are subject to materialvariations in short-term indebtedness under our credit facilities on a seasonalbasis, due to the timing and price of commodity purchases to meet customerdemands.

 

ThroughSeptember 21, 2009, we relied on the following credit and commodityhedging arrangements to provide the liquidity necessary for operation of ournatural gas and electricity businesses:

 

·                  The Revolving CreditFacility was used primarily to post letters of credit required to effectivelyoperate within the markets that we serve;

·                  The Hedge Facility was usedas our primary facility to economically hedge variability in the cost ofnatural gas; and

·                  Commodity derivativearrangements with various counterparties were used to economically hedgevariability in the cost of electricity.

 

Asharp drop in natural gas market prices during the six months ended December 31,2008 resulted in a significant reduction in the natural gas inventory componentof the available borrowing base under the Revolving Credit Facility.  The reduced borrowing base strained ourability to post letters of credit as collateral with suppliers and hedgeproviders, caused defaults of certain financial covenants included in theagreement that governed the Revolving Credit Facility, prompted downgrades inour credit ratings and ultimately resulted in our seeking and obtainingmaterial waivers of debt covenants and defaults and amendments to the agreementthat governed the Revolving Credit Facility and the Hedge Facility.  Such amendments had significant impacts onour liquidity position and on our operations during fiscal year 2009 and duringthe first quarter of fiscal year 2010.

 

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Asa result of the Restructuring, we significantly decreased our outstanding debtobligations and debt service requirements for fiscal years 2010 and futureyears.  In addition, the Revolving CreditFacility and Hedge Facility were replaced by the Commodity Supply Facility,which provides us with a stable source of liquidity through August 2012with an investment grade counterparty. Overall, the transactions consummated in the Restructuring improved ourliquidity position, improved our financial and operational flexibility andallowed us to compete more effectively within the markets that we serve.

 

TheCommodity Supply Facility provides for cash borrowings of up to $45.0 millionthat we may access to finance seasonal working capital requirements, providedthat we are in compliance with the Collateral Coverage Ratio requirement, asdescribed below.  These cash borrowingswill accrue interest at the greater of: (1) RBS Sempra’s cost of fundsplus 5%; or (2) LIBOR plus 5%. Outstanding credit support (e.g., letters of credit and/or guarantees)provided by RBS Sempra will accrue interest at LIBOR plus 3%, with a minimumrate of 4% except that, if the cash held in certain collateral accounts exceedsall outstanding settlement payments under the Commodity Supply Facility by$27.0 million, interest will accrue at a reduced rate of 1% on the amount ofoutstanding credit support in excess of $27.0 million.

 

Inaccordance with the terms of the ISDA Master Agreements, we are required tomaintain a minimum collateral coverage ratio (the “Collateral Coverage Ratio”)of 1.25:1.00 for the months of October through March (inclusive) and1.40:1.00 for any other calendar month. The Collateral Coverage Ratio is calculated as the ratio of: (1) certainof our assets, primarily cash, amounts due from RBS Sempra representing ouroperating cash, accounts receivable from our customers and LDCs and natural gasinventories; to (2) certain of our liabilities, primarily arising fromexposure and/or amounts due to RBS Sempra as a result of our agreements(including amounts due for the purchase of natural gas and electricity, accruedbut unpaid financing fees and settlements arising from derivative contracts).

 

Asof June 30, 2010, we had a Collateral Coverage Ratio of approximately3.41:1.00.  The calculation of theCollateral Coverage Ratio as of June 30, 2010 reflected availableliquidity under the Commodity Supply Facility of approximately $62.3million.  At June 30, 2010, we hadno outstanding cash advances and had $34.0 million of letters of creditoutstanding under the Commodity Supply Facility.

 

***Cash Flow***

 

Duringfiscal year 2010, our cash and cash equivalents decreased $17.0 million to abalance of $6.2 million at the end of the period.  Approximately $36.0 million of cash wasprovided by operating activities during the period, which reflects an $88.8million change from the $52.8 million used in operations for fiscal year 2009.

 

In connectionwith the Commodity Supply Facility, certain banking relationships thatpreviously belonged to the Company are now under RBS Sempra’s name andcontrol.  RBS Sempra releases cash to usas required to meet our ongoing operating cash requirements.  The ISDA Master Agreements also includeprovisions that allow for net settlement of amounts from and due to RBSSempra.  Accordingly, we report amountsdue from and due to RBS Sempra net on the consolidated balance sheets.  At June 30, 2010, the net $43.1 millionamount due from RBS Sempra, which is reported as accounts receivable, net — RBSSempra on the consolidated balance sheets, represents net cash available to usfor working capital needs during future months.

 

Duringfiscal year 2009, in connection with amendments to the Revolving CreditFacility, we deposited $75.0 million of our operating cash into a new cashaccount, which was restricted for use as collateral to provide security forletters of credit outstanding under the Revolving Credit Facility.  In connection with the Restructuring, therestrictions on this account were removed, and the cash was returned to us andused for various Restructuring-related transactions.

 

Cashprovided by operating activities during fiscal year 2010 also reflects thefollowing net activity:

 

·                  Higher net income (after adjustment fornon-cash operating items such as unrealized gains and losses from riskmanagement activities, depreciation and amortization expense, deferred incometax expense, provision for doubtful accounts and stock compensation expense)resulting from higher gross profit (excluding unrealized gains and losses fromrisk management activities), lower non-cash operating expenses and lower non-cashinterest expense; offset by

·                  Higher use of operating cash for workingcapital items, mostly as a result of various transactions and activity relatedto the Restructuring;

·                  $9.0 million was transferred from cash andcash equivalents to an escrow account (the “Fixed Rate Notes Escrow Account”),which is maintained as security for future interest payments to holders of theFixed Rate Notes due 2014; and

·                  Higher use of operating cash for acquisitionof customers.

 

TheRestructuring also resulted in the following material uses of cash and cashequivalents for investing and financing activities:

 

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·                  $26.7 million was paid to bondholders inpartial exchange for their Floating Rate Notes due 2011;

·                  $12.0 million of principal outstanding underthe Denham Credit Facility, plus accrued and unpaid interest, was repaid andthe Denham Credit Facility was terminated;

·                  $6.4 million of legal, consulting and otherfees directly related to various Restructuring transactions were paid andrecorded as deferred debt issuance costs ($6.1 million) and stock issue costsrecorded as a reduction of additional paid in capital ($0.3 million).  The deferred debt issue costs will beamortized as an increase to interest expense over the remaining terms of therelated agreements; and

·                  $5.4 million of principal outstanding underthe Bridge Financing Loans, plus accrued and unpaid interest, were repaid and the Bridge Financing Loans wereterminated.

 

***CommoditySupply Facility***

 

As a result of theRestructuring consummated on September 22, 2009, the Revolving CreditFacility, Hedge Facility and various arrangements for the supply of natural gasand electricity were replaced by the Commodity Supply Facility.   Under the Commodity Supply Facility, the primary obligors are MXenergy Inc. and MXenergyElectric Inc. and all obligations are guaranteed by Holdings and its otherdomestic subsidiaries.  Obligations underthe Commodity Supply Facility are secured by a first priority lien onsubstantially all of Holdings’ and its domestic subsidiaries’ existing andfuture assets, other than an interest reserve account held on behalf of theholders of the Fixed Rate Notes due 2014.  The maturity date of the Commodity Supply Facility is August 31,2012.  RBS Sempra will have the right toextend such maturity date by one year at its sole discretion, provided thatsuch notice is provided by RBS Sempra no later than April 30, 2011.

 

The Commodity SupplyFacility provides for the exclusive supply of physical (other than as neededfor balancing) and financial natural gas and electricity, credit support(including letters of credit and guarantees) for certain collateral needs,payment extension financing and/or storage financing as needed, and associatedhedging transactions in order to maintain the Company’s required matchedtrading book.  In addition,the Commodity Supply Facility provides that we release natural gastransportation and storage capacity to RBS Sempra and for RBS Sempra to performcertain natural gas and electricity nominations. The Commodity Supply Facilityalso will provide for RBS Sempra to act on the Company’s behalf to satisfy therequirements of regional transmission operators for capacity rights andancillary services.

 

TheCommodity Supply Facility is governed by separate ISDA Master Agreements fornatural gas and electricity.  Duringfiscal year 2010, we entered into amendments to the ISDA Master Agreements fornatural gas and electricity, respectively, with the Company and certain of itssubsidiaries, as guarantors, and RBS Sempra. The following changes to the ISDA Master Agreements resulted from theseamendments:

 

·                  The definition of Adjusted ConsolidatedTangible Net Worth in the ISDA Master Agreements was amended to excludenon-cash charges associated with any deferred tax valuation allowances;

·                  The date by which we were required to releaseor arrange for the release of all of our pipeline transportation and storagecapacity on interstate and inter provincial pipelines directly to RBS Semprawas extended to April 1, 2010 from December 31, 2009;

·                  Certain fees related to natural gas supplyand hedging activity specifically related to the SSO program were revised; and

·                  Natural gas purchased by us from RBS Sempraas a result of our participation in the SSO Program was specifically excludedfrom certain volume limitations and/or minimum purchase requirements under theISDA Master Agreements.

 

Asof June 30, 2010, we were in compliance with all provisions of the ISDAMaster Agreements.

 

Underthe supply terms of the Commodity Supply Facility, the Company has the abilityto: (1) seek commodity price quotes from third parties for certainphysically or financially settled transactions with respect to gas andelectricity; and (2) request that RBS Sempra enter into such transactionswith such third parties at such prices and to concurrently enter intoback-to-back off-setting transactions with the Company with respect to suchthird party transactions.  RBS Semprawould not be obligated to enter into a transaction with any third party unlessRBS Sempra is satisfied with such transaction and the volume of thosetransactions does not exceed annual limits. In addition to the actual purchase price paid by RBS Sempra and certainrelated costs and expenses, the Company will be charged a fee for such third-partypurchases.

 

The Commodity SupplyFacility also provides for certain volumetric fees for all natural gas andelectricity purchases, as well as minimum purchase requirements for bothnatural gas and electricity over the initial three-year term and over theoptional one-year extension term.

 

Under the hedging termsof the Commodity Supply Facility, theaggregate notional exposure amount of fixed price hedges allowed to be enteredinto by the Company will be limited to $260.0 million, without adjustment formark-to-market movements thereafter. Fixed price hedges will be limited to a contract length term of 24months.  In addition, the fixed price 

 

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portfolioof hedges will be limited to a weighted-average volumetric tenor not to exceed14 months in duration.**** With regards to the Company’s fixed pricecustomer mix, the Company may not, during any 12 month period, enter into anynew fixed price contracts with respect to the gas business where theresidential customer equivalents of such contracts are greater than 75% of allresidential customer equivalents of all new contracts entered into during suchperiod and/or maintain a customer portfolio with more than 325,000 residential customer equivalents operating under fixed price contracts.

 

The maximum amount ofcash borrowings permitted under the storage and/or payment extension financingprovisions of the Commodity Supply Facility will be $45.0 million.  These cash borrowings will accrue interest atthe greater of: (1) RBS Sempra’s cost of funds plus 5%; or (2) LIBORplus 5%.  Outstanding credit support(e.g., letters of credit and/or guarantees) provided by RBS Sempra will accrueinterest at the greater of 4% or LIBOR plus 3%, provided however, that, if onany date of determination, no termination event has occurred with respect toHoldings and its affiliates and the cash held in certain collateral accountsexceeds all outstanding settlement payments under the Commodity SupplyFacility, interest will accrue at a reduced rate of 1.0% on that portion of thecredit support amount that is in excess of $27.0 million.

 

In connection with theaggregate exposure outstanding under the Commodity Supply Facility, the Companymust maintain a Collateral Coverage Ratio greater than 1.25:1.0 during themonths of October through March, and greater then 1.4:1.0 during themonths of April through September. In addition, the Company must maintain a consolidated tangible networth, as defined in the agreement that governs the Commodity Supply Facility,of at least $60.0 million.

 

The ISDA MasterAgreements contain customary covenants that restrict certain activitiesincluding, among other things, the Company’s ability to:

 

·                  incur additional indebtedness;

·                  create or incur liens;

·                  guarantee obligations of other parties;

·                  engage in mergers, consolidations, liquidations anddissolutions;

·                  create subsidiaries;

·                  make acquisitions;

·                  engage in certain asset sales;

·                  enter into leases or sale-leasebacks;

·                  make equity distributions;

·                  make capital expenditures;

·                  make loans and investments;

·                  make certain dividend, debt and other restrictedpayments;

·                  engage in a different line of business;

·                  amend, modify or terminate certain material agreementsin a manner that is adverse to the lenders; and

·                  engage in certain transactions with affiliates.

 

The Commodity SupplyFacility also contains customary events of default, including:

 

·                  payment defaults;

·                  breaches of representations and warranties;

·                  covenant defaults;

·                  cross defaults to certain other indebtedness in excessof specified amounts;

·                  certain events of bankruptcy and insolvency;

·                  ERISA defaults;

·                  judgments in excess of specified amounts;

·                  failure of any guaranty or security documentsupporting the Commodity Supply Facility to be in full force and effect;

·                  the termination or cancellation of any materialcontract which termination or cancellation could reasonably be expected to havea material adverse effect on us; or

·                  a change of control.

 

***FixedRate Notes due 2014***

 

Pursuant to theRestructuring consummated on September 22, 2009, the Company issued $67.8million aggregate principal amount of Fixed Rate Notes due 2014. Interest on the Fixed Rate Notes due 2014 accrues at the rate of 13.25%per annum and is payable semi-annually in cash on February 1 and August 1of each year, commencing on February 1, 2010, to the holders of record ofthe Fixed Rate Notes due 2014 on the immediately preceding January 15 and July 15.  The Fixed Rate Notes due 2014 will mature on August 1,2014.  The Fixed Rate Notes due2014 were issued at a discount of $17.8 million, which was recorded as areduction from the Fixed Rate Notes due 2014 on our consolidated balance sheetsduring the first 

 

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quarterof fiscal year 2010, and which will be amortized as an increase to interestexpense over the remaining life of the Fixed Rate Notes due 2014.

 

On December 30, 2009, we entered into a purchase agreement (the “Stockand Notes Purchase Agreement”) pursuant to which a holder of our Class ACommon Stock and Fixed Rate Notes due 2014 (the “Seller”) agreed to sell itsholdings to us.  Pursuant to the Stockand Notes Purchase Agreement, on January 4, 2010, we acquiredapproximately $0.5 million aggregate principal amount of Fixed Rate Notes due2014 from the Seller for approximately $0.3 million.  The resulting gain on extinguishment of debtof $0.2 million was recorded as a reduction of interest expense during fiscalyear 2010.  A pro rata portion ofdeferred debt issue costs and original debt issue discount associated with theFixed Rate Notes due 2014 acquired, which approximated an aggregate amount of$0.1 million, was also recorded as additional interest expense during fiscalyear 2010.

 

The Fixed Rate Notesdue 2014 are senior subordinatedsecured obligations of the Company, subordinated in right of payment to obligationsof the Company under the Commodity Supply Facility.  The Fixed Rate Notes due 2014 are senior inpriority to the Company’s unsecured senior obligations, including theFloating Rate Notes due 2011, to the extent of the value of the assets securingthe Fixed Rate Notes due 2014 in excess of the aggregate amount of the outstanding Commodity Supply Facility obligations.

 

The Fixed RateNotes due 2014 are jointly, severally, fully and unconditionally guaranteed by alldomestic subsidiaries of Holdings.

 

The Fixed Rate Notesdue 2014 are secured by a first priority interest in the Fixed Rate NotesEscrow Account and by a second-priority security interest in substantially allother existing and future assets of the Company.  The Fixed Rate Notes Escrow Account wasfunded with approximately $9.0 million in September 2009, which representsthe approximate interest payable on the Fixed Rate Notes due 2014 for atwelve-month period.

 

***Floating Rate Notes due 2011***

 

OnAugust 4, 2006, we issued $190.0 million aggregate principal amountof Floating Rate Notes due 2011, which mature on August 1, 2011 and bearinterest at a rate equal to LIBOR plus 7.5% per annum.  During fiscal years 2008 and 2007, wepurchased $12.8 million and $12.0 million, respectively, of aggregate principalamount of Floating Rate Notes due 2011, plus accrued interest, from noteholdersfor amounts less than face value.  As of June 30,2009, we had $165.2 million aggregate principal amount of Floating Rate Notesdue 2011 outstanding.

 

Asa result of the Restructuring, we exchanged $158.8 million aggregate principalamount of Floating Rate Notes due 2011 for $26.7 million of cash, $67.8 millionaggregate principal amount of Fixed Rate Notes due 2014 and 33,940,683 sharesof newly authorized Class A Common Stock. Holders of $6.4 million aggregate principal amount of Floating RateNotes due 2011 did not tender their notes pursuant to the Restructuring.  These Floating Rate Notes due 2011 willremain on our consolidated balance sheets until their maturity date in August 2011unless acquired or retired by us at an earlier date.  The indenture governing the Floating RateNotes due 2011 was amended to eliminate substantially all of the restrictivecovenants and certain events of default from such indenture.

 

Theweighted-average interest rate for the Floating Rate Notes due 2011 was 8.26%and 10.02% for fiscal years 2010 and 2009, respectively.  We have entered into interest rate swapagreements to hedge the floating rate interest expense on the Floating RateNotes due 2011.  Refer to Item 7A of thisAnnual Report for additional commentary regarding our management of interestrate risk and the interest rate swaps.

 

**Summary of Contractual Obligations**

 

Thefollowing table discloses aggregate information about our contractualobligations and commercial commitments as of June 30, 2010:

 

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| ** **                                    | ** ** | **Contractual Obligation Amounts Maturing In** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Less Than  1 Year**                                    | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                                            | ** ** |
|                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Fixed Rate Notes due 2014 (1)                 |       | $                                                                  | —     |   | $ | — |   | $ | 67,293 |   | $ | — |   | $ | 67,293 |   |
| Floating Rate Notes due 2011 (2)              |       | —                                                             |       | 6,413 |   | — |   | — |   | 6,413 |   |
| Operating leases (3)                          |       | 590                                                                |       | 916 |   | 472 |   | 605 |   | 2,583 |   |
| Capacity charge commitments (4)               |       | 7,068                                                              |       | — |   | — |   | — |   | 7,068 |   |
| Natural gas physical purchase commitments (5) |       | 38,392                                                             |       | — |   | — |   | — |   | 38,392 |   |
| Electricity physical purchase commitments (5) |       | 7,319                                                              |       | 382 |   | — |   | — |   | 7,701 |   |
| Total                                         |       | $                                                                  | 53,369     |   | $ | 7,711 |   | $ | 67,765 |   | $ | 605 |   | $ | 129,450 |   |

 

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(1)          Includes the aggregateprincipal amount under the Fixed Rate Notes due 2014.  Excludes related unamortized discount of$14.9 million as of June 30, 2010.

 

(2)          Includes the aggregateprincipal amount under the Floating Rate Notes due 2011.  Excludes related unamortized discount of lessthan $0.1 million as of June 30, 2010.

 

(3)          Includes amounts anticipatedto be paid for leased office space under non-cancelable operating leases, whichcontain escalation clauses, have terms that expire between July 2010 andOctober 2017 and are subject to extension at the option of the Company.  We take into account all escalation clauseswhen determining the amount of future minimum lease payments.  All future minimum lease payments arerecognized on a straight-line basis over the minimum lease term.

 

(4)          Includes anticipated feesassociated with agreements to transport and store natural gas.  These agreements are take-or-pay in that wemust pay for the capacity committed even if we do not use the capacity.

 

(5)          Includes both fixed andvariable portions of physical forward contracts. The variable portion isindexed as the NYMEX settle price for the corresponding delivery month in whichthe natural gas is purchased. The estimated contractual obligations are basedon the NYMEX forward curve as of June 30, 2010 for all correspondingdelivery months.

 

AtJune 30, 2010, $34.0 million of letters of credit were outstanding underthe Commodity Supply Facility, which were posted as collateral under varioustransportation and storage agreements. As of June 30, 2010, all outstanding letters of credit werescheduled to mature during fiscal 2011. New letters of credit are expected to be issued as necessary to meetcollateral requirements during fiscal year 2011.

 

Underthe Commodity Supply Facility, we are obligated to purchase a minimum of130,000,000 MMBtus of natural gas from RBS Sempra, for physical delivery inaccordance with the following schedule:  (1) 39,000,000MMBtus during the first contract year; (2) 44,000,000 MMBtus during thesecond contract year; and (3) 47,000,000 MMBtus during the third contractyear.  In addition, we are obligated topurchase a minimum of 1,850,000 MWhrs of electricity from RBS Sempra, forphysical delivery in accordance with the following schedule:  (1) 500,000 MWhrs during the firstcontract year; (2) 650,000 MWhrs during the second contract year; and (3) 700,000MWhrs during the third contract year. The estimated total value of these purchases will depend upon the marketprice of natural gas at the time of purchase. During fiscal year 2010, our average price paid for natural gas rangedfrom a high of approximately $6.40 per MMBtu in January 2010 to a low ofapproximately $2.80 per MMBtu in September 2009, and our average pricepaid for electricity ranged from a high of approximately $82.60 per MWhr in January 2010to a low of approximately $64.60 per MWhr in March 2010.

 

TheCompany will be obligated to pay a volumetric fee for any unused balance of theminimum volume purchase requirement for any contract year, or if the agreementis terminated prior to the end of the contract. As of June 30, 2010, commodity that we expect to purchase fordelivery to our customers during the first and second contract years of theCommodity Supply Facility is expected to exceed the minimum purchase obligationfor natural gas and electricity.  Theexcess of actual commodity purchases from RBS Sempra over the minimum purchaserequirement for any contract year, if any, will be deducted from the minimumpurchase requirement for the subsequent contract year.

 

**Off-Balance Sheet Arrangements**

 

Wedid not have any off-balance sheet arrangements as of June 30, 2010 or2009.

 

**Critical Accounting Policies**

 

Thepreceding discussion and analysis of our financial condition and results ofoperating results are based on our consolidated financial statements, whichhave been prepared in conformity with U.S. GAAP.  The significant accounting policies used inthe preparation of our consolidated financial statements are more fullydescribed in the consolidated financial statements included in Item 8 of this AnnualReport.

 

Manyof our significant accounting policies require complex judgments to estimatevalues of assets and liabilities.  Inmaking these judgments, management must make certain estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues andexpenses.  Because changes in suchestimates and assumptions could significantly affect our reported financialposition and results of operations, detailed policies and control procedureshave been established to ensure that 

 

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valuationmethods, including judgments made as part of such methods, are well controlled,independently reviewed, and are applied consistently from period to period.

 

Onan on-going basis, we evaluate our estimates, which are based on historicalexperience, weather data, terms of existing customer contracts, and variousother assumptions that we believe to be reasonable under the circumstances.  Our actual results may differ from theseestimates and assumptions.

 

Ofthe significant policies used to prepare our consolidated financial statements,the items discussed below require critical accounting estimates involving ahigh degree of judgment and complexity. For all of these critical policies, we caution that future events rarelydevelop exactly as forecasted, and the best estimates routinely requireadjustment. This information should be read in conjunction with ourconsolidated financial statements included herein.

 

***Revenue Recognition***

 

Werecognize revenue from the sale of natural gas and electricity in the period inwhich customers consume the commodity. Our customers are billed monthly on various dates throughout the month.  We accrue revenues for natural gas andelectricity consumed by customers, but not yet billed, under the cycle billingmethod.  Total unbilled revenue was $17.4million and $16.3 million at June 30, 2010 and 2009, respectively.

 

Ourestimates of unbilled revenues are determined by considering the followingfactors:

 

·                  estimates of commodity volume consumed bycustomers during a calendar month;

·                  the average sales price per unit for eachrespective market area and customer class;

·                  commodity volumes delivered to the LDC duringthe calendar month;

·                  timing of billings completed under the cyclebilling method; and

·                  impact of previous unbilled accountsreceivable accruals.

 

Unbilledrevenue estimates are adjusted to actual billings in subsequent periods whenthe meters are read and any change in previous estimates is reflected inoperations during the period that the change is determined.  Unbilled revenue recognition is considered tobe a critical accounting policy because estimates of commodity volumes consumedby customers are dependent upon various factors, including:

 

·                  Weather conditions and customer usageprofiles have a direct impact on the consumption of natural gas and electricityby our customers.  The projected impactof current weather conditions on customer usage profiles utilized in ourestimates may differ from historical averages.

·                  Other factors, such as economic conditions ina market area, the prices charged to customers for natural gas and electricityconsumed and natural or man-made disasters that can limit the availability ofnatural gas and electricity, can have a significant impact on customerconsumption.

 

Wecan never be certain how retail energy customers will respond to weatherconditions or other factors that are outside of our control.  As a result, actual consumption may differsignificantly from our estimates, which could result in significant adjustmentsto revenue in the month of “true-up.”

 

***Allowance for Doubtful Accounts***

 

Weassume the credit risk associated with non-payment by our customers in marketswhere LDCs do not guarantee customer accounts receivable.  In those markets, we record an allowance fordoubtful accounts based on the age of accounts receivable, customer paymenthistory, past loss experience and current market conditions.  The allowance for doubtful accounts andprovision for doubtful accounts are summarized in the following table.

 
| ** **                                                                                           | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2010**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                           | ** ** | **(in thousands)**                            | ** ** |
|                                                                                                 |       |                                               |       |   |   |   |   |
| Non-guaranteed accounts receivable from customers  at period-end                                     | ** ** | **$**                                              | **28,754** |   | $ | 37,226 |   | $ | 52,871 |   |
|                                                                                                 |       |                                               |       |   |   |   |   |
| Allowance for doubtful accounts at period-end                                                        | ** ** | **$**                                              | **5,074**  |   | $ | 7,344 |   | $ | 5,154 |   |
|                                                                                                 |       |                                               |       |   |   |   |   |
| Allowance for doubtful accounts as a percentage of  non-guaranteed accounts receivable at period end | ** ** | **17.6**                                           | **%**      | 19.7 | % | 9.7 | % |
|                                                                                                 |       |                                               |       |   |   |   |   |
| Provision for doubtful accounts for the period                                                       | ** ** | **$**                                              | **5,164**  |   | $ | 12,009 |   | $ | 5,050 |   |

 

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Werecognize that there is a high degree of subjectivity and imprecision inherent inthe process of estimating future credit losses that are based on historicaltrends and customer data.  Criticalfactors that could impact the recorded level of allowances for doubtfulaccounts include:

 

·                  theconcentration of our business in non-guaranteed markets, such as Georgia andTexas;

·                  economicconditions in our markets, which may deteriorate and impact the ability of ourcustomers to pay their balances owed to us when due;

·                  the seasonalityof our business; and

·                  our cost ofcommodity, which affects our pricing for commodity supplied to customers.

 

Weare also subject to credit risk associated with the creditworthiness of LDCsthat guarantee customer accounts receivable balances.  Although all of the LDCs that guarantee ourcustomer accounts receivable had investment grade credit ratings as of June 30,2010, any detrimental change in the creditworthiness of these LDCs could affecttheir ability to pay us amounts when due, and may result in the need for higherallowances and provisions for doubtful accounts.

 

Inaddition, we may bear credit risk related to imbalance settlement receivablesfrom LDCs and ISOs, to the extent that such LDCs and ISOs are unable to collectimbalance settlements payable to them by other retail marketers.   We record an allowance for doubtful accountsduring the month that full collection of any such imbalance receivable balancebecomes doubtful.  Therefore, thecreditworthiness of other retail marketers, which is difficult to predict andmonitor, may also impact our allowance and provision for doubtful accounts.

 

***Goodwill***

 

Goodwillof $3.8 million on our consolidated balance sheet represents the excess ofpurchase price over the fair value of identifiable net assets acquired fromSESCo in August 2006.   Goodwill hasbeen assigned entirely to the natural gas business segment since the customersacquired from SESCo were natural gas accounts.

 

Goodwillis not amortized, but is reviewed for impairment annually at June 30 ormore frequently if events, transactions or changes in circumstances indicatethat the carrying amount may not be recoverable.  We utilize a combination of methods toestimate the fair value of our natural gas reporting unit, including adiscounted cash flows methodology for near-term estimable earnings and a discountedmultiple of earnings methodology to estimate a terminal value.  Critical assumptions used for the fair valuemodel include:

 

·                  earnings forecasts for the natural gasbusiness segment, which reflect assumptions for growth in natural gas RCEs (netof attrition), expected gross profit and expense trends;

·                  a terminal value multiple; and

·                  the discount rate used to calculate the presentvalue of future cash flows.

 

Ourimpairment testing of goodwill is considered to be a critical accountingestimate due to the significant judgment required for certain assumptionsutilized in the models to determine fair value. Assumptions used involve a high degree of subjectivity that is based onhistorical experience and internal forecasts of future results.  Actual results in future periods may notnecessarily approximate historical experience or forecasts.

 

Wecompleted our annual goodwill impairment test as of June 30, 2010, andconcluded that the goodwill assigned to the natural gas business segment wasnot at risk for impairment as of that date. As of June 30, 2010, the estimated fair value of the natural gasbusiness segment was more than double its carrying value.

 

***Customer Acquisition Costs, net***

 

TheCompany capitalizes costs associated with the acquisition of customers to theextent that they are incremental direct costs and that such costs can be recoveredfrom the future economic benefit resulting from the customer relationship.  The Company acquires customers as a result ofthe following activities:

 

·                  bulk acquisitions and business combinations;

·                  payments to third-party contractors forsuccess-based marketing activities;

·                  payments to third-party contractors forhourly paid direct-response telemarketing activities.

 

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Financialinformation regarding our customer acquisition costs is summarized in thefollowing table.

 
| ** **                                                                        | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2010**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                            | ** ** |
|                                                                              |       |                                               |       |   |   |   |   |
| Total customer acquisition costs, net of  accumulated amortization, at period-end | ** ** | **$**                                              | **30,425** |   | $ | 27,950 |   | $ | 41,693 |   |
|                                                                              |       |                                               |       |   |   |   |   |
| Customer acquisition costs capitalized during the  period (1)                     | ** ** | **$**                                              | **22,289** |   | $ | 16,034 |   | $ | 19,555 |   |
|                                                                              |       |                                               |       |   |   |   |   |
| Amortization of customer acquisition costs during  the period                     | ** ** | **$**                                              | **19,814** |   | $ | 29,777 |   | $ | 23,414 |   |

 

Customeracquisition costs are capitalized and amortized over the estimated life of acustomer, which we generally estimate to be three years.  Customer acquisition costs that are subjectto amortization are reviewed for recoverability quarterly, or whenever eventsor changes in circumstances indicate that the carrying amount may not berecoverable.

 

Ourmodel used to assess the estimated recoverability of customer acquisition costsincludes estimates of the future cash flows expected to result from the use ofthe customer assets and their eventual disposition.  The estimated fair value resulting from thismodel is compared with the carrying amount of the asset.  If impairment were to be identified, it couldresult in additional expense recorded in our consolidated statement ofoperations.  Estimation of future cashflows includes consideration of specific assumptions for customer attrition,per unit gross profit, and operating costs. The estimate of future cash flows is considered to be a criticalestimate because the assumptions used involve a high degree of subjectivity andare based on historical experience and internal forecasts of futureresults.  Actual results in future periodsmay not necessarily approximate historical experience or forecasts.  As of June 30, 2010, the estimatedfuture cash flows from our customer relationships significantly exceeded thecarrying value of customer acquisition costs. Management believes that the carrying value of customer acquisitioncosts is not at risk of impairment as of June 30, 2010.

 

Theaverage three-year life of a customer is also considered to be a criticalassumption because it is an estimate of the expected period over which anaverage customer will provide us with cash flows.  If competitive market conditions were todeteriorate for us, customer attrition could increase, which could result in alower average life of a customer.

 

Asa result of all quarterly reviews conducted for the fiscal year endedJune 30, 2009, we have concluded that there was no impairment to thecarrying value of customer acquisition costs recorded on our consolidatedbalance sheets.

 

***Income Taxes***

 

Weoperate within multiple tax jurisdictions. The calculations of income tax expense or benefit and related balancesheet amounts involve a high degree of management judgment regarding estimatesof the timing and probability of recognition of revenue and deductions.  The interpretation of tax laws involves uncertainty,since tax authorities may interpret laws differently than we do.  We are subject to audit in all of our taxjurisdictions, which may involve complex issues and may require an extendedperiod of time to resolve.  Ultimateresolution of tax matters may result in favorable or unfavorable impacts to ournet income and/or cash flows.  Inmanagement’s opinion, adequate reserves have been recorded for any future taxesthat may be owed as a result of examination by any taxing authority.

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amount of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes using enacted tax rates expected to bein effect for the year in which the temporary differences are expected toreverse.

 

Totalcombined current and long-term deferred income tax assets were $33.2 millionand $46.8 million at June 30, 2010 and 2009, respectively.  Our policy is to establish a valuationallowance if it is “more likely than not” that the related tax benefits willnot be realized.  At June 30, 2010,we determined that it was “more likely than not” that a portion of our deferredtax assets would not be realized.

 

Asof June 30, 2010 and 2009, we had $3.2 million and $18.7 million,respectively, of deferred tax assets related to unrealized losses from riskmanagement activities.  We anticipatethat these deferred tax assets will be realized in future periods when sales ofrelated fixed price commodities occur.  Therefore,we did not establish a valuation allowance for these deferred tax assets at June 30,2010.

 

Forour remaining deferred tax assets, which totaled $30.0 million and $28.1million at June 30, 2010 and 2009, respectively, we determined based onavailable evidence, including historical financial results for the last threeyears, that it is “more likely than not” that a portion of these items may notbe recoverable in the future. Accordingly, at June 30, 2010 and 2009, we 

 

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recordedtotal valuation allowances of approximately $28.1 million and $22.7 million,respectively, as a reduction of deferred tax assets.  The valuation allowance represented 94% and81% of related deferred tax assets as of June 30, 2010 and 2009,respectively.

 

Thevaluation allowance related to deferred tax assets is considered to be acritical estimate because, in assessing the likelihood of realization ofdeferred tax assets, management considers taxable income trends andforecasts.  Actual income taxes expensedand/or paid could vary from estimated amounts due to the impacts of variousfactors, including:

 

·                  changes to taxlaws by taxing authorities;

·                  final review offiled tax returns by taxing authorities; and

·                  actualfinancial condition and results of operations for future periods that coulddiffer from forecasted amounts.

 

***Derivatives***

 

Weutilize both physical commodity contracts and financial derivative instrumentsto reduce our exposure to fluctuations in the price of natural gas andelectricity.  Settlements of derivativeinstruments are recognized on a monthly basis, generally based upon thedifference between the contract price and the settlement price as quoted onNYMEX, relevant ISO or other published sources. Derivative instruments are carried on the balance sheet at fairvalue.  Any changes in fair value areadjusted through unrealized losses (gains) from risk management activities inthe consolidated statements of operations. This accounting results in significant volatility in earnings due to theimpact market prices have on the market positions and derivative instrumentsthat we have entered into.

 

Whereavailable, we use quoted market prices to determine fair value.  If quoted market prices are not available,management seeks price information from external sources, including brokerquotes and industry publications.  Whenevaluating pricing information provided by brokers and other pricing services,we consider whether the broker is willing and able to enter into transaction atthe quoted price, whether the quotes are based on an active market, or, if thequotes are based on an inactive market, the extent to which brokers areutilizing a particular model if pricing is not available.

 

Ifpricing information from external sources is not available, or if we believethat observable pricing information is not indicative of fair value, managementjudgment is required to develop estimates of fair value.  In these cases, fair value is determinedusing internally developed valuation models based on inputs that are eitherdirectly observable or derived from and corroborated by market data.  These unobservable inputs incorporate marketparticipants’ assumptions about risks in the asset or liability and the riskpremium required by market participants in order to bear the risks.  Our assets and liabilities that are reportedat fair value are measured based on quoted market prices and observablemarket-based or independently-sourced inputs.

 

Wegenerally utilize a market approach for our recurring fair valuemeasurements.  In forming our fair valueestimates, we maximize the use of observable inputs for the respectivevaluation model.  For reporting purposeswe classify our fair value measurements according to the hierarchy summarizedin Note 15 of the consolidated financial statements located in Item 8 of thisAnnual Report.  If a fair valuemeasurement reflects inputs from different levels within the fair valuehierarchy, the measurement is classified based on the lowest level of inputthat is significant to the fair value measurement.  The key inputs and assumptions utilized forthe fair value measurements recorded by the Company are summarized as follows:

 

***Financial natural gas derivative contracts*** —NYMEX-referenced swaps are valued utilizing unadjusted market commodity quotesfrom a pricing service, which are considered to be quotes from an activemarket, but are deemed to be Level 2 inputs because the swaps are not anidentical instrument to the NYMEX-referenced commodity.  Basis swaps and options are generally valuedusing observable broker quotes.  Otherinputs and assumptions include contract position volume, price volatility, commoditydelivery location, credit quality of the Company and of derivativecounterparties, credit enhancements, if any, and time value.

 

***Financial electricity derivative contracts —*** Electricityswaps are valued utilizing market commodity quotes from a pricing service,which are deemed to be observable inputs. Other inputs and assumptions include contract position volume, pricevolatility, commodity delivery location, credit quality of the Company and ofderivative counterparties, credit enhancements, if any, and time value.

 

***Physical forward natural gas and electricity derivative contracts —*** The Companyutilizes market commodity quotes from a pricing service to value theseinstruments, which are deemed to be observable inputs.  Other inputs and assumptions include contractposition volume, commodity delivery location, credit quality of the Company andof derivative counterparties, credit enhancements, if any, and time value.

 

***Interest rate swaps —*** Interest rate swaps arevalued utilizing quotes received directly from swap counterparties.  Key inputs and assumptions include interestrate curves, credit quality of the Company and of derivative counterparties,credit 

 

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enhancements,if any, and time value.

 

Theassumptions used for these pricing models are considered to be criticalestimates due to the high level of management judgment utilized in theirdevelopment.  In particular, imprecisionin estimating unobservable market inputs can impact the amount of unrealizedgains or losses from risk management activities recorded on our consolidatedbalance sheets and our consolidated statements of operations for a particular financialinstrument.  Furthermore, while webelieve our valuation methods are appropriate, the use of differentmethodologies or assumptions to determine the fair value of certain financialassets and liabilities could result in a different estimate of fair value atthe reporting date.

 

Wehave implemented risk management controls and limits to monitor our riskposition related to derivatives, including a VAR analysis to assess potentiallosses in the fair value of our natural gas portfolio and to ensure thathedging performance is in line with agreed-upon objectives.  Refer to Item 7A of this Annual Report foradditional information.

 

***Common Stock Valuation***

 

Priorto the Restructuring, we utilized an internal stock valuation model tocalculate appropriate values for redeemable preferred stock, stock options andwarrants granted under our stock-based compensation plans and common stockissued directly to our executive officers and third parties.  In connection with the Restructuring, weutilized our stock valuation model to assign value to all classes of commonstock issued to holders of our debt, RBS Sempra, former holders of ourredeemable preferred stock and holders of our common stock outstanding prior tothe Restructuring.  Subsequent to theRestructuring, we utilized our stock valuation model to calculate anappropriate value for RSUs granted to our directors, a former director andcertain of our senior executives.

 

Asour common stock is not publicly traded, there is no readily-available marketsource of information to estimate its fair value.  Therefore, we utilize an internal stockvaluation model in order to calculate the grant-date fair value for stock-basedcompensation awards.  At a minimum, wecomplete the stock valuation model on a quarterly basis, as of September 30th, December 31st, March 31st and June 30th of eachfiscal year.  For the June 30th model, we contract with an independentvaluation company to calculate a fair value at that date.  For the remaining quarter-end valuationdates, we utilize an internal valuation model that closely resembles themethodology utilized by the independent valuation company as of the previous June 30th valuation date.  The grant date stock value assigned to stockcompensation awards is generally determined from our most recently completedquarter-end valuation model, unless any matters arose during the time betweenthe most recent quarter-end model and the grant date that would have had amaterial impact on the stock valuation.

 

Keyestimates and assumptions used in our stock valuation models include:

 

·                  revenue and expense forecasts and assumedearnings multiples based on comparable companies; and

·                  a discount rate applied to the future cashflows assumed to result from future earnings.

 

Theassumptions utilized in the stock valuation model require significantmanagement judgment.  Revenue and expenseforecasts include assumptions that involve a high degree of subjectivity andare based on historical experience and internal forecasts of futureresults.  There can be no assurance thatactual future earnings will approximate these estimates.

 

**New Accounting Pronouncements Adopted During the Fiscal YearEnded June 30, 2010**

 

InJune 2009, the Financial Accounting Standards Board (the “FASB”) issuedStatement of Financial Accounting Standards No. 168, “The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples — a replacement of FASB Statement No. 162” (“SFAS No. 168”).  Effective for financial statements issued forinterim and annual periods ending after September 15, 2009, the AccountingStandards Codification (the “ASC”) supersedes all existing accounting andreporting standards, excluding those issued by the SEC, and is now the singlesource of authoritative U.S. GAAP for entities that are not SECregistrants.  Rules andinterpretative releases of the SEC are also sources of U.S. GAAP for SECregistrants.  The Company adopted theprovisions of SFAS No. 168 effective for the financial statements includedin this Form 10-K.  The adoption ofSFAS No. 168, as codified by ASC Topic 105, “Generally Accepted AccountingPrinciples,” impacted the Company’s financial statement disclosures, but didnot have any effect on its financial position or results of operations.

 

EffectiveJuly 1, 2009, the Company adopted ASC guidelines regarding accounting andreporting for business combinations that are consummated after July 1,2009.  These guidelines include certainchanged principles and requirements related to: (1) recognition and measurementsof identifiable assets acquired, liabilities assumed, goodwill acquired, anygain from a bargain purchase, and any noncontrolling interest in an acquiredcompany; (2) application issues relating to accounting and disclosures forassets and liabilities arising from contingencies in a business combination;and (3) disclosures regarding business combinations in financialstatements.  The Company will apply theASC guidelines prospectively to business 

 

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combinationtransactions consummated after July 1, 2009, if any.  The Company did not consummate any businesscombination transactions during the fiscal year ended June 30, 2010.

 

InAugust 2009, the FASB issued Accounting Standards Update No. 2009-05,“Fair Value Measurements and Disclosures” (“ASU 2009-05”).  ASU 2009-05 amends ASC Topic 820, “Fair ValueMeasurements and Disclosures” by providing additional guidance clarifying themeasurement of liabilities at fair value. The amendments prescribed by ASU 2009-05 became effective for theCompany’s quarterly reporting period ending December 31, 2009 and did nothave any impact on the Company’s financial position or results of operations.

 

InFebruary 2010, the FASB issued Accounting Standards Update No. 2010-09,“Subsequent Events (Topic 855) — Amendments to Certain Recognition andDisclosure Requirements” (“ASU 2010-09”). ASU 2010-09 amends ASC Topic 855, “Subsequent Events,” by clarifying thescope of disclosure requirements related to subsequent events.  The amendments prescribed by ASU 2010-09became effective for the Company’s quarterly reporting period ending March 31,2010 and did not have any impact on the Company’s financial position or resultsof operations.

 

InJanuary 2010, the FASB issued Accounting Standards Update No. 2010-06(“ASU 2010-06”), which amends FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”  The amended guidance in ASU 2010-06 requiresentities to disclose additional information regarding assets and liabilitiesthat are transferred between levels of the fair value hierarchy.  ASU 2010-06 also requires that required Level3 disclosures regarding purchases, sales, issuances and settlements be reportedon a gross basis.  ASU 2010-06 clarifiesexisting guidance pertaining to the level of disaggregation at which fair valuedisclosures should be made and the requirements to disclose information aboutthe valuation techniques and inputs used in estimating Level 2 and Level 3 fairvalue measurements.  The amended guidancein ASU 2010-06 pertaining to disclosure of transfers between levels of the fairvalue hierarchy, the level of disaggregation of disclosures and disclosure ofvaluation techniques and inputs used in estimating Level 2 and Level 3measurements became effective and were adopted for the Company’s quarterly reporting period ending March 31,2010.

 

Therequirement to disclose Level 3 purchases, sales, issuances and settlements ona gross basis will become effective for fiscal years (and for interim periodswithin those fiscal years) beginning after December 15, 2010.  TheCompany intends to adopt these provisions effective for its quarterly reportingperiod ending September 30, 2011.

 

**Risk Management**

 

***Overview***

 

Somedegree of risk is inherent in virtually all of our activities.  As a result of our business growth into newmarkets and increased complexity of our operating infrastructure, wecontinuously review and, where necessary, upgrade our risk management policiesand systems.  The objectives of our riskmanagement policies and systems include:

 

·                  Timely identification of various risksassociated with our business;

·                  Assessment of potential costs that can beconsidered in relation to expected rewards from taking such risks;

·                  Development and/or acquisition of adequateprotections against identified risks;

·                  Appropriate monitoring and disclosure ofrisks to all concerned parties; and

·                  Development of adequate staff trainingprograms regarding compliance with relevant laws, regulations, internalpolicies and procedures and established systems of internal controls.

 

Riskmanagement oversight begins with our Board of Directors and its committees,principally the Audit Committee and the Risk Oversight Committee.  The Audit Committee consists of four membersof the Board of Directors and is chaired by an independent director.  The Audit Committee meets with our outsideauditors shortly after the end of each quarterly and year-end reporting periodand reviews and approves all financial reports filed with the SEC.

 

TheRisk Oversight Committee is chaired by an independent director and includesfour additional directors.  The RiskOversight Committee meets at least quarterly, and as often as necessary, toensure that we have adhered to established risk management policies, to reviewour risk management activities and positions and to address any changes topolicies or activities that may be necessary. We also have an independent risk management department that isresponsible for monitoring and enforcing risk management policies related tocommodities hedging activities.

 

***Market Risk Management***

 

Marketrisks result primarily from changes in commodity prices and interestrates.  In the normal course of business,we also have limited credit risks associated with our ability to collect fromderivative counterparties and collect billed accounts receivable from customersand LDCs.

 

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Ourprimary market risk management objective is to maintain volume and priceneutrality by using physical supply, storage and commodity derivatives tomitigate market risks resulting from changes in commodity prices and interestrates.  Our risk management policies arereviewed at least annually to ensure that material risks associated withongoing market risks, new products, asset acquisitions and other changes in ourrisk profile are adequately addressed.

 

Referto Item 7A of this Annual Report for additional commentary regarding marketrisks.

 

***Liquidity Risk Management***

 

Liquidityrisk is the risk that we would be unable to meet our obligations as they becomedue or unable to fund business growth because of an inability to liquidateassets or obtain adequate funding.  Underthe oversight of the Audit Committee, liquidity is managed by the CFO toprovide the ability to generate cash to fund current operating, investing andfinancing activities and to manage the cost of purchases of natural gas andelectricity at a reasonable cost in a reasonable amount of time, whilemaintaining routine operations and market confidence.  The following strategies and processes areutilized to manage liquidity:

 

·*                 ****Utilizeour hedging strategy to reduce the impact of volatile commodity prices —*** We have a riskmanagement policy that is intended to reduce our financial exposure related tochanges in the price of natural gas and electricity.  Under this policy, we hedge anticipatednatural gas and electricity commodity purchases required to meet expectedcustomer demand for all accounts served under fixed price contracts.  As of June 30, 2010, we utilized theCommodity Supply Facility as our exclusive natural gas and electricity hedgefacility.

 

·                  ***Utilizeour credit facilities to provide liquidity for operating requirements*****—** Under theCommodity Supply Facility, we have a ready source of liquidity, primarily inthe form of letters of credit used for collateral to be placed with hedgecounterparties, commodity suppliers and providers of transportation and storageservices.  As of June 30, 2010, webelieve that the Commodity Supply Facility will be adequate to supplement cashprovided by operations for meeting our operational liquidity needs for fiscalyear 2011.

 

·*                 ****Maximizepricing opportunities within the markets that we serve*****—** We strive tooffer products and prices that are competitive within the markets we serve andallow us to realize a reasonable gross profit per MMBtu or MWhr sold.  Maximizing our gross profit is crucial to ouroverall financial success and liquidity position.

 

·                  ***Maximizecash collections from LDCs and customers —*** During fiscal year 2010,approximately 49% of our total sales of natural gas and electricity were withinmarkets that guarantee customer accounts receivable.  The LDCs in these markets have credit ratingsthat are investment grade.  We monitorthe payment histories, credit ratings and other financial information for theseLDCs in order to identify and address adverse trends, if any.  As of June 30, 2010, we do not maintainan allowance for doubtful accounts against receivables from these LDCs as we donot anticipate any material credit losses related to these receivables.

 

Forcustomer accounts receivable that are not guaranteed by LDCs, we have processesand information systems in place to ensure that appropriate amounts are billedand collected from our customers on a timely basis.  We maintain an allowance for doubtfulaccounts against receivables from these customers, as we do not anticipate anymaterial credit losses related to these receivables.  Refer to Item 7A of this Annual Report foradditional commentary regarding credit risk.

 

***Operational and ComplianceRisk Management***

 

Operationalrisk is the risk of loss arising from fraud, unauthorized activities, errors,omissions, inefficiency, system failure or other external events.  Operational risk is inherent throughout ourbusiness organization and covers a wide spectrum of issues.

 

Compliancerisk is the risk arising from failure to comply with relevant laws, regulationsand regulatory requirements governing the conduct of our business.  Failure to effectively identify and addressvarious compliance risks can result in financial penalties and other regulatorysanctions, litigation, damage to reputation and loss of customers.

 

Underthe general oversight of our Board of Directors, CEO and CFO, operational andcompliance risks are directly managed within the following functional areas ofthe organization:

 

·                  Compliance and regulatory affairs;

·                  Marketing and sales;

·                  Contract pricing;

·                  Natural gas and electricity supply;

 

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·                  Customer operations (including activitiesrelated to billing and collections, quality assurance related to variousmarketing programs and management of customer communications);

·                  Financial accounting and reporting;

·                  Tax accounting and reporting;

·                  Legal counsel; and

·                  Human Resources and payroll.

 

Managementwithin each of these areas is directly responsible for identification of risks,development of formal policies and procedures to manage such risks, andreporting any incidents, events or transactions, if any, where risks may not beadequately mitigated.  Under thedirection of the Audit Committee and the CFO, the Director of Internal Audit isresponsible for investigating and addressing any such incidents, events ortransactions for their impact on our overall risk management environment, onour internal control framework, and on the planning of internal audits.

 

***Fraud Risk***

 

Wehave a formal fraud risk assessment program, which is designed to facilitate:

 

·                  Identification of potential fraud risks;

·                  Design of internal controls to address andmitigate the fraud risks identified;

·                  Periodic reviews of controls foreffectiveness; and

·                  Monitoring of corporate activities and formalreporting of potential incidents, if necessary, to senior management and theBoard of Directors.

 

Underthe general oversight of the Audit Committee and the CFO, our Director ofInternal Audit is responsible for administering the fraud risk assessmentprogram and reporting the results to the Audit Committee.

 

***Information Systems***

 

Wemaintain a number of information systems for capturing customer, accounting,supply forecasting and risk management information.  The majority of our systems are hosted at anoffsite data center in Houston, Texas, which maintains 24/7 security and hasstand-alone power generation to keep the data center functional in the case ofan extended power outage.

 

Duringfiscal year 2008, in conjunction with our hosting provider, we launched aninitiative to modernize our key server infrastructure to increase reliabilityand to increase redundancy.  Duringfiscal 2010, we continued to consolidate our multiple existing customerrelationship management tools and multiple billing platforms.  As of June 30, 2010, more than 95% ofour customers had been consolidated into our primary strategic systems.** **Weare also continuing to convert our demand forecasting and risk managementoperations to new or enhanced third party software systems.  We are currently utilizing these systems andwill continue to make enhancements during fiscal year 2011.

 

Weperform daily backup of our key servers and maintain backup tapes for a periodof four weeks before they are overwritten. We also perform a month-end backup of key servers and keep such data fora period of six months to one year. All backup tapes are stored offsite at asecure storage facility.  We currentlyreplicate our email and various other production servers to ensure availabilityof our critical systems.  We are in theprocess of increasing this functionality to additional servers.

 

Wehave taken a multi-tiered approach to protecting our network from malware andintrusions.  We employ endpoint securitythat includes locked-down routers, dual firewalls, and other securityappliances.  These are supplemented withanti-spyware and virus protection on all workstations and windows servers.  These applications are monitored and updatedto respond pro-actively and successfully to changing threats.

 

Ourcorporate website has been custom-developed by an outsourced marketingcompany.   We host our corporate websiteonsite with an employee of the Company serving as our webmaster.

 

***BusinessContinuity Planning***

 

Weare committed to the protection of our employees, customers, shareholders,physical buildings, information systems and corporate records.  Our disaster recovery plan and the geographicdistance between our offices mitigate the risk of catastrophic interruption ofour business.

 

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**ITEM 7A. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**CommodityPrice Risk**

 

Commodityprice risk is the risk of exposure to fluctuations in the price of natural gasand electricity.  Because our contractsrequire that we deliver full commodity requirements to our customers andbecause our customers’ usage is impacted by factors such as weather, we areexposed to fluctuations in customer load requirements.  We typically purchase commodity equal toexpected customer consumption assuming normal weather patterns.  We may purchase additional commodity volumesfor the summer in the case of electricity and for the winter in the case ofnatural gas in order to protect against a potential demand increase in peakseasons.  As a result of the naturalswing in customer consumption related to weather changes, we may have to buy orsell additional volumes, and therefore may be exposed to price volatility inthat event.  We utilize various hedgingstrategies in order to mitigate the risk associated with potential volumetricvariability of our monthly deliveries for fixed priced customers.

 

Weutilize the following instruments to offset price risk associated with volumecommitments under fixed and variable price contracts where the price to thecustomer must be established ahead of the index settlement:  (1) for natural gas: NYMEX-referencedgas swaps, basis swaps, physical commodity hedges and physical basis hedges;and (2) for electricity: ISO zone specific swaps, basis swaps, physicalhedges and physical basis hedges.

 

Economichedges are also utilized to cover inventory injection and withdrawal as well asto cover utility over/under delivery obligations.  For fixed price customers, both inventory andimbalances caused by utility over/under delivery obligations are hedged usingderivatives or physical hedges.  Forvariable price customers, inventory is generally hedged using derivativeinstruments or physical commodity hedges and utility imbalances are hedgedeither through the utilization of derivatives, physical hedges, or through amonthly price adjustment as published and billed to the customer eachmonth.  The fair values of these hedges,which are recorded in unrealized gains (losses) from risk management activitieson the consolidated balance sheet, will settle during each specific month tomirror our planned injections and withdrawals, as well as over/under deliveryobligations.

 

Thenatural gas swap instruments are generally settled with respect to eachdelivery month against the final settlement price determined on the lasttrading day of the Henry Hub futures contract listed for such month on theNYMEX.  In the case of electricity swapinstruments, settlement is based on ISO settlement prices during themonth.  Natural gas basis swaps are typically settled against the first ofthe month published index prices at various trading points that relate tolocations where we have customer obligations.  Basis swaps are pricedbased on the NYMEX settlement price on the last trading day of the futurescontract delivery month plus or minus an agreed-upon premium ordiscount.   All of the natural gasand electricity swaps have been executed “over-the-counter” on a bilateralbasis under the Commodity Supply Facility.  We also enter into financialswaps with other counterparties in order to meet electricity requirements.These are settled based on the index price for the appropriate ISO.  Weonly execute financial swaps with entities with investment grade creditratings.   As of June 30, 2010,our hedge positions extended through March 2013.

 

Wehave adopted a risk management policy to measure and limit market and creditrisk associated with our customer portfolio. The risk policy requires that we maintain a balanced position at alltimes and does not permit speculative trading. None of our employees are compensated on the basis of his or her tradingactivities.  In marketing products toresidential and small commercial customers, we hedge in advance of anticipatedcontract sales (adjusted to reflect attrition). When marketing to larger commercial accounts, the hedge is executed atthe time of the contract sale.  Ourcurrent risk policy requires that the following exposures be promptlymitigated: (1) for natural gas, any exposure in excess of $1.0 millionrelated to the volumetric difference between commitments to deliver natural gasto customers and the related hedge positions must be brought back in compliancewithin three business days; and (2) for electricity, any exposure greaterthan $750,000 related to the volumetric difference between commitments todeliver electricity to customers and related hedge positions must be broughtback in compliance within three business days.

 

Inorder to address the potential volume variability of future deliveries, weutilize various hedging strategies to mitigate our exposure.  For natural gas, hedging tools mayinclude:  (i) over-hedging wintervolume obligations in certain markets by up to 10% in order to provide priceand volume protection resulting from unexpected increases in demand or bypurchasing calls; (ii) utilizing gas in storage to offset variability inwinter demand; (iii) entering into options settled against daily basisprices published in an industry publication, for each day during some or all ofthe winter months, that protect against rising prices of additional dailyvolumes if demand increases; and (iv) purchasing put options to protectagainst falling prices if unused volume needs to be sold and to protect againstcustomer attrition in excess of that historically experienced.  For electricity, hedging tools include: (i) over-hedgingsummer on-peak volume obligations by up to 10% or purchasing call options inorder to provide price and volume protection from unexpected increases indemand during peak or “super-peak” hours; (ii) entering into load shapehedges to cover the inherent imbalance from a normal consumption curve that ablock 

 

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hedgecreates; and (iii) purchasing put options to protect against fallingprices if unused volume needs to be sold and to protect against customerattrition in excess of that historically experienced.

 

Weutilize an internally developed modified variance/co-variance value-at-risk “VAR,”model to estimate potential loss in the fair value of our natural gasportfolio.  For our VAR model, we utilizethe higher of 10-day and 30-day NYMEX volatility on a 2 standard deviationbasis (95.45% confidence level).  Duringthe three months ended September 30, 2008, volatility in natural gasprices resulted in unusually high potential losses in the fair value of ournatural gas portfolio using this VAR model.

 

Thepotential losses in the fixed price natural gas portfolio using our actual netopen position at the end of each month during the fiscal years ended June 30,2010, 2009 and 2008 are summarized in the following table.  Unusually high volatility in natural gascommodity prices during the final three months of fiscal year 2008 and thefirst six months of fiscal year 2009 resulted in unusually high potentiallosses in the fair value of our natural gas portfolio during those periodsusing this VAR model.

 
| ** **                             | ** ** | **Fiscal Year Ended** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **2010**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                             | ** ** | **(in thousands)**         | ** ** |
| **Potential loss during the  period:** |       |                            |       |   |   |   |   |
| Average                                |       | $                               | **32**     |   | $ | 120 |   | $ | 108 |   |
| Maximum                                | ** ** | **71**                          |       | 624 |   | 366 |   |
| Minimum                                | ** ** | **4**                           |       | 25 |   | 13 |   |
|                                        |            |                                 |            |  |  |  |  |  |  |  |

 

Therehave been no material changes in our methodology or policies regardingcommodity price risk management during the fiscal year ended June 30,2010.

 

**CreditRisk**

 

Weare exposed to credit risk in our risk management activities.  Credit risk is the risk of loss resultingfrom the nonperformance by a counterparty of its contractual obligations.  Our fixed price positions are executed underagreements that include master netting arrangements, which mitigate outstandingcredit exposure.  Under the CommoditySupply Facility, our economic hedging activities are with a financialinstitution that has an investment grade credit rating.

 

Wealso are exposed to credit risk in our sales activities.  During fiscal year 2010, approximately 51% ofour total sales of natural gas and electricity were within markets where LDCsdo not guarantee customer accounts receivable while 49% of our total sales werewithin markets where LDCs guarantee customer accounts receivable at a weightedaverage discount rate of approximately 1%. Such discount is the cost incurred to guarantee the customer accountsreceivable.  In cases where the LDCguarantees customer accounts receivable, we are exposed only to the credit riskof the LDC, rather than that of our actual customers.  We monitor the credit ratings of LDCs and theparent companies of LDCs that guarantee our customer accounts receivable.  As of June 30, 2010, all of our customeraccounts receivable in LDC-guaranteed markets were with LDCs with investmentgrade credit ratings.  We alsoperiodically review payment history and financial information for LDCs to ensurethat we identify and respond to any deteriorating trends.

 

Theallowance for doubtful accounts represents our estimate of potential creditlosses associated with customer accounts receivable in markets where suchreceivables are not guaranteed by LDCs. We assess the adequacy of our allowance for doubtful accounts throughreview of the aging of customer accounts receivable and our assessment of thegeneral economic conditions in the markets that we serve.  Based upon our review as of June 30,2010, we believe that the allowance for doubtful accounts is adequate to coverpotential credit losses related to customer accounts receivable.

 

Werecord a provision for doubtful accounts for the estimated total revenue thatis not expected to be collected from customers in non-guaranteed markets.  The following table provides a summary of theprovision for doubtful accounts as a percentage of total sales of natural gasand electricity within these markets.

 
| ** **                                                                                                                            | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2010**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Provision for doubtful accounts as a percentage of  sales of natural gas and electricity in non-guaranteed markets during the  period |       | 1.79                                               | %          | 2.79 | % | 1.19 | % |

 

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Duringfiscal year 2009, we experienced deterioration of the aging of billed customeraccounts receivable within certain of our markets, particularly in our largestnatural gas market in Georgia, primarily due to:

 

·                  generally weak economic conditions; and

·                  incremental charge offs and reservesassociated with customer accounts acquired from Catalyst in October 2008,which were higher than historical levels for previous purchase acquisitions,and which contributed significantly to a higher provision for doubtful accountsin our Georgia market.

 

Creditenvironments generally stabilized in many of our markets during fiscal year2010.  Additionally, we initiated morestringent credit standards for our new and existing customers during fiscalyear 2009, which resulted in generally higher credit quality in our customerportfolio during fiscal year 2010.  Wecontinue to closely monitor economic conditions and actual collections data withinall of our markets for signs of any negative long-term trends that could resultin higher allowance requirements.

 

Therehave been no material changes in our methodology or policies regarding creditrisk management during the fiscal year ended June 30, 2010.

 

**InterestRate Risk**

 

Weare exposed to risk from fluctuations in interest rates in connection with theCommodity Supply Facility and the Floating Rate Notes due 2011.  We manage our exposure to interest ratefluctuations by utilizing interest rate swaps to effectively convert interestrate exposure from a variable rate to a fixed rate of interest.  As of June 30, 2010, an $80.0 millionswap was outstanding, which expires on August 1, 2011.  The fixed-for-floating swap effectively fixesthe six-month LIBOR rate at 5.72% per annum. During fiscal year 2010, the $80.0 million interest rate swap agreementwas novated to RBS Sempra from the previous counterparty, as required by theterms of the Commodity Supply Facility. Such novation did not have any impact on our rights, obligations, risksor accounting methodology associated with the interest rate swap agreement.

 

Underthe Commodity Supply Facility, we are subject to variable interest rates inconnection with cash borrowings and credit support, primarily in the form ofletters of credit, provided by RBS Sempra. As of June 30, 2010, approximately $34.0 million of letters ofcredit were outstanding under the Commodity Supply Facility, as well as $6.4million aggregate principal amount of Floating Rate Notes due 2011.

 

Asof June 30, 2010, based on the net exposure resulting from the interestrate swap, the letters of credit outstanding under the Commodity SupplyFacility and the outstanding balance of Floating Rate Notes due 2011, theimpact of a 1% change in interest rates on interest expense for a twelve-monthperiod is approximately $0.4 million.

 

Wehave not designated interest rate swaps as hedges and, accordingly, changes inthe market value of the interest rate swaps are charged directly to interestexpense.  At June 30, 2010, thetotal unrealized loss from risk management activities recorded on theconsolidated balance sheets related to interest rate swaps was approximately$6.0 million.  As of June 30, 2010,we posted $6.0 million of cash as collateral against our mark-to-market exposurerelated to the outstanding interest rate swap agreement.

 

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**ITEM8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM AND CONSOLIDATEDFINANCIAL STATEMENTS**

 
| ** **                                                                                                   | **Page** |
|--------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                         |     |
| Report of Independent Registered Public Accounting  Firm                                                     | 65       |
| Consolidated Balance Sheets at June 30, 2010 and  2009                                                  | 66       |
| Consolidated  Statements of Operations for the years ended June 30, 2010, 2009 and  2008                | 67       |
| Consolidated  Statements of Stockholders’ Equity for the years ended June 30, 2010,  2009 and 2008 | 68       |
| Consolidated  Statements of Cash Flows for the years ended June 30, 2010, 2009 and  2008                | 69       |
| Notes to Consolidated Financial Statements                                                                   | 70       |

 

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**Report ofIndependent Registered Public Accounting Firm**

 

TheBoard of Directors and StockholdersMXenergy Holdings Inc.

 

Wehave audited the accompanying consolidated balance sheets of MXenergy HoldingsInc. as of June 30, 2010 and 2009, and the related consolidated statementsof operations, stockholders’ equity, and cash flows for each of the three yearsin the period ended June 30, 2010. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting.Our audits included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of MXenergy HoldingsInc. at June 30, 2010, and 2009, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedJune 30, 2010, in conformity with U.S. generally accepted accountingprinciples.

 

 

/s/Ernst & Young LLP

Stamford,Connecticut

September 28,2010

 

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**MXENERGY HOLDINGS INC.**

**ConsolidatedBalance Sheets**

**(dollars in thousands)**

 
| ** **                                                                                                                                                    | ** ** | **Balance at June 30,** | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|
| ** **                                                                                                                                                    | ** ** | **2010**                               | ** **  | **2009** | ** ** |
|                                                                                                                                                          |       |                                   |        |   |   |
| **Assets**                                                                                                                                                    |       |                                   |        |   |   |
| Current assets:                                                                                                                                               |       |                                   |        |   |   |
| Cash and cash equivalents                                                                                                                                     | ** ** | **$**                                  | **6,220**   |   | $ | 23,266 |   |
| Restricted cash                                                                                                                                               | ** ** | **1,574**                              |        | 75,368 |   |
| Fixed Rate Notes Escrow Account (Note 17)                                                                                                                     | ** ** | **8,977**                              |        | — |   |
| Accounts receivable from customers and LDCs, net  (Note 6)                                                                                                    | ** ** | **48,925**                             |        | 47,598 |   |
| Accounts receivable, net — RBS Sempra (Note 16)                                                                                                          | ** ** | **43,054**                             |        | — |   |
| Natural gas inventories (Note 7)                                                                                                                              | ** ** | **15,861**                             |        | 29,415 |   |
| Current portion of unrealized gains from risk  management activities, net (Notes 14 and 15)                                                                   |       | —                                 |        | 294 |   |
| Income taxes receivable                                                                                                                                       | ** ** | **6,063**                              |        | 6,461 |   |
| Deferred income taxes (Note 12)                                                                                                                               | ** ** | **1,378**                              |        | 9,020 |   |
| Other current assets (Note 11)                                                                                                                                | ** ** | **16,272**                             |        | 12,084 |   |
| Total current assets                                                                                                                                          | ** ** | **148,324**                            |        | 203,506 |   |
| Goodwill (Note 8)                                                                                                                                             | ** ** | **3,810**                              |        | 3,810 |   |
| Customer acquisition costs, net (Note 9)                                                                                                                      | ** ** | **30,425**                             |        | 27,950 |   |
| Fixed assets, net (Note 10)                                                                                                                                   | ** ** | **2,739**                              |        | 3,728 |   |
| Deferred income taxes (Note 12)                                                                                                                               | ** ** | **3,629**                              |        | 15,089 |   |
| Deferred debt issuance costs (Notes 16 and 17)                                                                                                                | ** ** | **12,552**                             |        | 4,475 |   |
| Other assets                                                                                                                                                  | ** ** | **541**                                |        | 513 |   |
| Total assets                                                                                                                                                  | ** ** | **$**                                  | **202,020** |   | $ | 259,071 |   |
|                                                                                                                                                          |       |                                   |        |   |   |
| **Liabilities and stockholders’  equity**                                                                                                                | ** ** | ** **                             |        |   |   |
| Current liabilities:                                                                                                                                          | ** ** | ** **                             |        |   |   |
| Accounts payable and accrued liabilities (Note 13)                                                                                                            | ** ** | **$**                                  | **30,302**  |   | $ | 43,147 |   |
| Current portion of unrealized losses from risk  management activities, net (Notes 14 and 15)                                                                  | ** ** | **16,731**                             |        | 34,224 |   |
| Deferred revenue                                                                                                                                              | ** ** | **7,457**                              |        | 4,271 |   |
| Denham Credit Facility (Note 22)                                                                                                                              | ** ** | **—**                             |        | 12,000 |   |
| Deferred income taxes (Note 12)                                                                                                                               | ** ** | **—**                             | ** **  | **—** | ** ** |
| Bridge Financing Loans payable (Note 20)                                                                                                                      | ** ** | **—**                             |        | 5,400 |   |
| Total current liabilities                                                                                                                                     | ** ** | **54,490**                             |        | 99,042 |   |
| Unrealized losses from risk management activities,  net (Notes 14 and 15)                                                                                     | ** ** | **1,857**                              |        | 14,071 |   |
| Long-term debt (Note 16)                                                                                                                                      | ** ** | **58,722**                             |        | 163,476 |   |
| Total liabilities                                                                                                                                             | ** ** | **115,069**                            |        | 276,589 |   |
|                                                                                                                                                          |       |                                   |        |   |   |
| Redeemable Convertible Preferred Stock (Note 18)                                                                                                              | ** ** | **—**                             |        | 54,632 |   |
|                                                                                                                                                          |       |                                   |        |   |   |
| Commitments and contingencies (Note 22)                                                                                                                       | ** ** | **—**                             |        | — |   |
|                                                                                                                                                          |       |                                   |        |   |   |
| Stockholders’ equity:                                                                                                                                    | ** ** | ** **                             |        |   |   |
| Common stock (Note 19)                                                                                                                                        | ** ** | ** **                             |        |   |   |
| Class A Common Stock (par value $0.01;  50,000,000 shares authorized; 33,940,683 shares issued and 33,710,902 shares  outstanding at June 30, 2010) | ** ** | **339**                                |        | — |   |
| Class B Common Stock (par value $0.01;  10,000,000 shares authorized; 4,002,290 shares issued and outstanding at  June 30, 2010)                    | ** ** | **40**                                 |        | — |   |
| Class C Common Stock (par value $0.01;  40,000,000 shares authorized; 16,413,159 shares issued and outstanding at  June 30, 2010)                   | ** ** | **164**                                |        | — |   |
| Common stock (par value $0.01; 10,000,000 shares  authorized; 4,681,219 shares issued and outstanding at June 30, 2009)                                  | ** ** | **—**                             |        | 47 |   |
| Total common stock                                                                                                                                            | ** ** | **543**                                |        | 47 |   |
| Additional paid-in capital                                                                                                                                    | ** ** | **139,702**                            |        | 18,275 |   |
| Class A treasury stock (229,781 shares at  June 30, 2010; Note 19)                                                                                  | ** ** | **(99**                                | **)**       | — |   |
| Accumulated other comprehensive loss                                                                                                                          | ** ** | **(156**                               | **)**       | (3 | ) |
| Accumulated deficit                                                                                                                                           | ** ** | **(53,039**                            | **)**       | (90,469 | ) |
| Total stockholders’ equity                                                                                                                               | ** ** | **86,951**                             |        | (72,150 | ) |
| Total liabilities and stockholders’ equity                                                                                                               | ** ** | **$**                                  | **202,020** |   | $ | 259,071 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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**MXENERGY HOLDINGS INC.**

**ConsolidatedStatements of Operations**

**(dollars in thousands)**

 
| ** **                                                                        | ** ** | **Fiscal Years Ended June 30,** | ** **  |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|
| ** **                                                                        | ** ** | **2010**                                            | ** **  | **2009** | ** ** | **2008** | ** ** |
|                                                                              |       |                                                |        |   |   |   |   |
| Sales of natural gas and electricity                                              | ** ** | **$**                                               | **561,206** |   | $ | 789,780 |   | $ | 752,283 |   |
| Cost of goods sold (excluding depreciation and  amortization):                    |       |                                                |        |   |   |   |   |
| Cost of natural gas and electricity sold                                          | ** ** | **386,934**                                         |        | 596,747 |   | 630,006 |   |
| Realized losses from risk management activities,  net                             | ** ** | **48,211**                                          |        | 72,824 |   | 6,747 |   |
| Unrealized (gains) losses from risk management  activities, net                   | ** ** | **(27,139**                                         | **)**       | 87,575 |   | (67,168 | ) |
| ** **                                                                        | ** ** | **408,006**                                         |        | 757,146 |   | 569,585 |   |
| Gross profit                                                                      | ** ** | **153,200**                                         |        | 32,634 |   | 182,698 |   |
|                                                                              |       |                                                |        |   |   |   |   |
| Operating expenses:                                                               |       |                                                |        |   |   |   |   |
| General and administrative expenses                                               | ** ** | **58,603**                                          |        | 59,957 |   | 62,271 |   |
| Advertising and marketing expenses                                                | ** ** | **3,749**                                           |        | 2,117 |   | 4,546 |   |
| Reserves and discounts                                                            | ** ** | **7,495**                                           |        | 15,130 |   | 7,130 |   |
| Depreciation and amortization                                                     | ** ** | **22,174**                                          |        | 37,575 |   | 32,698 |   |
| Total operating expenses                                                          | ** ** | **92,021**                                          |        | 114,779 |   | 106,645 |   |
|                                                                              |       |                                                |        |   |   |   |   |
| Operating profit (loss)                                                           | ** ** | **61,179**                                          |        | (82,145 | ) | 76,053 |   |
| Interest expense (net of interest income of $271,  $430 and $3,806, respectively) | ** ** | **34,982**                                          |        | 45,305 |   | 34,105 |   |
| Income (loss) before income tax (expense) benefit                                 | ** ** | **26,197**                                          |        | (127,450 | ) | 41,948 |   |
| Income tax (expense) benefit                                                      | ** ** | **(14,692**                                         | **)**       | 27,249 |   | (17,155 | ) |
| Net income (loss)                                                                 | ** ** | **$**                                               | **11,505**  |   | $ | (100,201 | ) | $ | 24,793 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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**MXENERGY HOLDINGS INC.**

**ConsolidatedStatements of Stockholders’ Equity**

**(dollars in thousands)**

 
| ** **                                             | ** ** | **Common  Stock  (Par Value)** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Class A   Treasury   Stock** | ** ** | **Unearned  Stock  Compensation** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **(Accumulated  Deficit)  Retained  Earnings** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------|------------|
|                                                   |       |                                |       |                             |       |                                          |       |                              |       |                                        |       |                                           |       |                                  |       |
| Balance  at June 30, 2007                         |       | $                                   | 34         |                             | $          | 21,367                                        |       | $                                 | —     |                                        | $          | (22                                            | )          | $                                     | (129       | ) | $ | 4,361 |   | $ | 25,611 |   |
| Issuance  of common stock                              |       | 2                                   |       | 1,337                            |       | —                                        |       | —                            |       | —                                      |       | —                                         |       | 1,339                                 |       |
| Revaluation  of Redeemable Convertible Preferred Stock |       | —                              |       | —                           |       | —                                        |       | —                            |       | —                                      |       | (19,422                                        | )          | (19,422                               | )          |
| Unamortized  stock compensation                        |       | —                              |       | (558                             | )          | —                                        |       | 558                               |       | —                                      |       | —                                         |       | —                                |       |
| Purchase  and cancellation of treasury shares          |       | —                              |       | (1,559                           | )          | —                                        |       | —                            |       | —                                      |       | —                                         |       | (1,559                                | )          |
| Stock  compensation expense                            |       | —                              |       | 2,244                            |       | —                                        |       | —                            |       | —                                      |       | —                                         |       | 2,244                                 |       |
| Tax  benefit on issuance of common stock from options  |       | —                              |       | 804                              |       | —                                        |       | —                            |       | —                                      |       | —                                         |       | 804                                   |       |
| Amortization  of stock compensation                    |       | —                              |       | —                           |       | —                                        |       | (540                              | )          | —                                      |       | —                                         |       | (540                                  | )          |
| Comprehensive  income (loss):                          |       |                                |       |                             |       |                                          |       |                              |       |                                        |       |                                           |       |                                  |       |
| Net  income                                            |       | —                              |       | —                           |       | —                                        |       | —                            |       | —                                      |       | 24,793                                         |       | 24,793                                |       |
| Foreign  currency translation                          |       | —                              |       | —                           |       | —                                        |       | —                            |       | (60                                         | )          | —                                         |       | (60                                   | )          |
| Comprehensive  income                                  |       | —                              |       | —                           |       | —                                        |       | —                            |       | —                                      |       | —                                         |       | 24,733                                |       |
|                                                   |       |                                |       |                             |       |                                          |       |                              |       |                                        |       |                                           |       |                                  |       |
| Balance  at June 30, 2008                         |       | 36                                  |       | 23,635                           |       | —                                        |       | (4                                | )          | (189                                        | )          | 9,732                                          |       | 33,210                                |       |
| Issuance  of common stock                              |       | 11                                  |       | (11                              | )          | —                                        |       | —                            |       | —                                      |       | —                                         |       | —                                |       |
| Revaluation  of Redeemable Convertible Preferred Stock |       | —                              |       | (5,853                           | )          | —                                        |       | —                            |       | —                                      |       | —                                         |       | (5,853                                | )          |
| Unamortized  stock compensation                        |       | —                              |       | (584                             | )          | —                                        |       | 584                               |       | —                                      |       | —                                         |       | —                                |       |
| Purchase  and cancellation of treasury shares          |       | —                              |       | (11                              | )          | —                                        |       | —                            |       | —                                      |       | —                                         |       | (11                                   | )          |
| Stock  compensation expense                            |       | —                              |       | 1,099                            |       | —                                        |       | —                            |       | —                                      |       | —                                         |       | 1,099                                 |       |
| Amortization  of stock compensation                    |       | —                              |       | —                           |       | —                                        |       | (580                              | )          | —                                      |       | —                                         |       | (580                                  | )          |
| Comprehensive  income (loss):                          |       |                                |       |                             |       |                                          |       |                              |       |                                        |       |                                           |       |                                  |       |
| Net  income                                            |       | —                              |       | —                           |       | —                                        |       | —                            |       | —                                      |       | (100,201                                       | )          | (100,201                              | )          |
| Foreign  currency translation                          |       | —                              |       | —                           |       | —                                        |       | —                            |       | 186                                         |       | —                                         |       | 186                                   |       |
| Comprehensive  income                                  |       | —                              |       | —                           |       | —                                        |       | —                            |       | —                                      |       | —                                         |       | (100,015                              | )          |
| ** **                                             | ** ** | ** **                          | ** ** | ** **                       | ** ** | ** **                                    | ** ** | ** **                        | ** ** | ** **                                  | ** ** | ** **                                     | ** ** | ** **                            | ** ** |
| Balance  at June 30, 2009                         | ** ** | **47**                              | ** ** | **18,275**                       | ** ** | **—**                                    | ** ** | **—**                        | ** ** | **(3**                                      | **)**      | **(90,469**                                    | **)**      | **(72,150**                           | **)**      |
| Issuance  of Class A Common Stock                 | ** ** | **339**                             | ** ** | **81,468**                       | ** ** | **—**                                    | ** ** | **—**                        | ** ** | **—**                                  | ** ** | **—**                                     | ** ** | **81,807**                            | ** ** |
| Issuance  of Class B Common Stock                 | ** ** | **40**                              | ** ** | **9,005**                        | ** ** | **—**                                    | ** ** | **—**                        | ** ** | ** **                                  | ** ** | ** **                                     | ** ** | **9,045**                             | ** ** |
| Issuance  of Class C Common Stock                 | ** ** | **164**                             | ** ** | **28,591**                       | ** ** | **—**                                    | ** ** | **—**                        | ** ** | **—**                                  | ** ** | **—**                                     | ** ** | **28,755**                            | ** ** |
| Acquisition  of Class A treasury stock            | ** ** | **—**                          | ** ** | **—**                       | ** ** | **(99**                                       | **)**      | **—**                        | ** ** | **—**                                  | ** ** | **—**                                     | ** ** | **(99**                               | **)**      |
| Cancellation  of common stock                          | ** ** | **(47**                             | **)**      | **—**                       | ** ** | **—**                                    | ** ** | **—**                        | ** ** | **—**                                  | ** ** | **—**                                     | ** ** | **(47**                               | )          |
| Stock  compensation expense                            | ** ** | **—**                          | ** ** | **2,363**                        | ** ** | **—**                                    | ** ** | **—**                        | ** ** | **—**                                  | ** ** | **—**                                     | ** ** | **2,363**                             | ** ** |
| Revaluation  of redeemable convertible preferred stock | ** ** | **—**                          | ** ** | **—**                       | ** ** | **—**                                    | ** ** | **—**                        | ** ** | **—**                                  | ** ** | **25,925**                                     | ** ** | **25,925**                            | ** ** |
| Comprehensive  income (loss):                          | ** ** | ** **                          | ** ** | ** **                       | ** ** | ** **                                    | ** ** | ** **                        | ** ** | ** **                                  | ** ** | ** **                                     | ** ** | ** **                            | ** ** |
| Net  income                                            | ** ** | **—**                          | ** ** | **—**                       | ** ** | **—**                                    | ** ** | **—**                        | ** ** | **—**                                  | ** ** | **11,505**                                     | ** ** | **11,505**                            | ** ** |
| Foreign  currency translation                          | ** ** | **—**                          | ** ** | **—**                       | ** ** | **—**                                    | ** ** | **—**                        | ** ** | **(153**                                    | **)**      | **—**                                     | ** ** | **(153**                              | **)**      |
| Comprehensive  income                                  | ** ** | **—**                          | ** ** | **—**                       | ** ** | **—**                                    | ** ** | **—**                        | ** ** | **—**                                  | ** ** | **—**                                     | ** ** | **11,352**                            | ** ** |
| ** **                                             | ** ** | ** **                          | ** ** | ** **                       | ** ** | ** **                                    | ** ** | ** **                        | ** ** | ** **                                  | ** ** | ** **                                     | ** ** | ** **                            | ** ** |
| Balance  at June 30, 2010                         | ** ** | **$**                               | **543**    | ** **                       | **$**      | **139,702**                                   | ** ** | **$**                             | **(99**    | **)**                                       | **$**      | **—**                                     | ** ** | **$**                                 | **(156**   | **)** | **$** | **(53,039** | **)** | **$** | **86,951** | ** ** |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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**MXENERGY HOLDINGS INC.**

**ConsolidatedStatements of Cash Flows**

**(dollars in thousands)**

 
| ** **                                                                                                             | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Operating activities:**                                                                                              | ** ** | ** **                                          |       |   |   |   |   |
| Net income (loss)                                                                                                      | ** ** | **$**                                               | **11,505** |   | $ | (100,201 | ) | $ | 24,793 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities:                    | ** ** | ** **                                          |       |   |   |   |   |
| Unrealized losses (gains) from risk management  activities                                                             | ** ** | **(27,139**                                         | **)**      | 87,575 |   | (67,168 | ) |
| Stock compensation expense                                                                                             | ** ** | **2,363**                                           |       | 519 |   | 1,704 |   |
| Provision for doubtful accounts                                                                                        | ** ** | **5,164**                                           |       | 12,009 |   | 5,050 |   |
| Depreciation and amortization                                                                                          | ** ** | **22,174**                                          |       | 37,575 |   | 32,698 |   |
| Deferred income tax expense (benefit)                                                                                  | ** ** | **19,102**                                          |       | (23,406 | ) | 18,187 |   |
| Non-cash interest expense, primarily unrealized  losses on interest rate swaps and amortization of debt issuance costs | ** ** | **10,146**                                          |       | 16,233 |   | 10,836 |   |
| Amortization of customer contracts acquired                                                                            | ** ** | **(50**                                             | **)**      | (634 | ) | (762 | ) |
| Changes in assets and liabilities, net of effects  of acquisitions:                                                    | ** ** | ** **                                          |       |   |   |   |   |
| Restricted cash                                                                                                        | ** ** | **73,794**                                          |       | (74,781 | ) | 463 |   |
| Fixed Rate Notes Escrow Account                                                                                        | ** ** | **(8,977**                                          | **)**      | — |   | — |   |
| Accounts receivable                                                                                                    | ** ** | **(6,491**                                          | **)**      | 28,066 |   | (35,231 | ) |
| Accounts receivable, RBS Sempra                                                                                        | ** ** | **(43,054**                                         | **)**      | — |   | — |   |
| Natural gas inventories                                                                                                | ** ** | **13,554**                                          |       | 36,509 |   | (7,308 | ) |
| Income taxes receivable                                                                                                | ** ** | **398**                                             |       | 1,063 |   | (7,173 | ) |
| Option premiums                                                                                                        | ** ** | **(335**                                            | **)**      | 1,571 |   | 1,191 |   |
| Other assets                                                                                                           | ** ** | **(4,732**                                          | **)**      | (10,443 | ) | 1,916 |   |
| Customer acquisition costs                                                                                             | ** ** | **(21,863**                                         | **)**      | (14,786 | ) | (18,193 | ) |
| Accounts payable and accrued liabilities                                                                               | ** ** | **(12,795**                                         | **)**      | (46,553 | ) | 17,882 |   |
| Deferred revenue                                                                                                       | ** ** | **3,186**                                           |       | (3,164 | ) | (4,352 | ) |
| Net cash provided by (used in) operating  activities                                                                   | ** ** | **35,950**                                          |       | (52,848 | ) | (25,467 | ) |
|                                                                                                                   |       |                                                |       |   |   |   |   |
| **Investing activities:**                                                                                              | ** ** | ** **                                          |       |   |   |   |   |
| Purchases of fixed assets                                                                                              | ** ** | **(1,328**                                          | **)**      | (1,001 | ) | (1,959 | ) |
| Purchase of assets of Catalyst Natural Gas LLC  assets                                                                 |       | —                                              |       | (1,609 | ) | — |   |
| Loan to PS Energy Group, Inc. related to  purchase of GasKey assets                                               |       | —                                              |       | — |   | (8,983 | ) |
| Cash received from PS Energy Group, Inc. for  repayment of loan                                                   |       | —                                              |       | — |   | 8,983 |   |
| Purchase of GasKey assets of PS Energy  Group, Inc.                                                               |       | (433                                                | **)**      | (500 | ) | (13,011 | ) |
| Purchase of assets of Vantage Power Services L.P.                                                                      |       | (36                                                 | **)**      | (57 | ) | (778 | ) |
| Net cash used in investing activities                                                                                  | ** ** | **(1,797**                                          | **)**      | (3,167 | ) | (15,748 | ) |
|                                                                                                                   |       |                                                |       |   |   |   |   |
| **Financing activities:**                                                                                              | ** ** | ** **                                          |       |   |   |   |   |
| Repayment of Floating Rate Notes due 2011                                                                              | ** ** | **(26,700**                                         | **)**      | — |   | — |   |
| Repurchase of Floating Rate Notes due 2011                                                                             |       | —                                              |       | — |   | (12,006 | ) |
| Repayment of Fixed Rate Notes due 2014                                                                                 | ** ** | **(423**                                            | **)**      | — |   | — |   |
| Proceeds from Denham Credit Facility                                                                                   |       | —                                              |       | 12,000 |   | — |   |
| Repayments of Denham Credit Facility                                                                                   | ** ** | **(12,000**                                         | **)**      | — |   | (11,040 | ) |
| Proceeds from Bridge Financing under the Revolving  Credit Facility                                                    |       | —                                              |       | 10,400 |   | — |   |
| Repayment of Bridge Financing under the Revolving  Credit Facility                                                     | ** ** | **(5,400**                                          | **)**      | (5,000 | ) | — |   |
| Proceeds from cash advanced under the Revolving  Credit Facility                                                       |       | —                                              |       | 30,000 |   | — |   |
| Repayment of cash advances under the Revolving  Credit Facility                                                        |       | —                                              |       | (30,000 | ) | — |   |
| Debt issuance costs                                                                                                    | ** ** | **(6,248**                                          | **)**      | (10,066 | ) | (1,307 | ) |
| Issuance of common stock from exercise of warrants  and options                                                        |       | —                                              |       | — |   | 387 |   |
| Issuance of common stock from other executive  compensation                                                            |       | —                                              |       | — |   | 952 |   |
| Purchase and cancellation of treasury shares, net  of tax benefit                                                      | ** ** | **(99**                                             | **)**      | (11 | ) | (755 | ) |
| Stock issuance costs                                                                                                   | ** ** | **(329**                                            | **)**      | — |   | — |   |
| Net cash (used in) provided by financing  activities                                                                   | ** ** | **(51,199**                                         | **)**      | 7,323 |   | (23,769 | ) |
| Net decrease in cash                                                                                                   | ** ** | **(17,046**                                         | **)**      | (48,692 | ) | (64,984 | ) |
| Cash and cash equivalents at beginning of year                                                                         | ** ** | **23,266**                                          |       | 71,958 |   | 136,942 |   |
| Cash and cash equivalents at end of year                                                                               | ** ** | **$**                                               | **6,220**  |   | $ | 23,266 |   | $ | 71,958 |   |
|                                                                                                                   |       |                                                |       |   |   |   |   |
| **Supplemental cash flow  information:**                                                                               | ** ** | ** **                                          |       |   |   |   |   |
| Income taxes paid                                                                                                      | ** ** | **$**                                               | **1,847**  |   | $ | 431 |   | $ | 5,405 |   |
| Interest paid                                                                                                          | ** ** | **20,072**                                          |       | 31,616 |   | 29,426 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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**MXENERGY HOLDINGS INC.**

**Notes to Consolidated FinancialStatements**

 

***Note 1.   Organization***

 

MXenergyHoldings Inc. (“Holdings”), originally founded in 1999 as a retail energymarketer, was incorporated as a Delaware corporation on January 24, 2005as part of a corporate reorganization. The two principal operating subsidiaries of Holdings, MXenergy Inc. andMXenergy Electric Inc., are engaged in the marketing and supply of natural gasand electricity, respectively.  Holdingsand its subsidiaries (collectively, the “Company”) operate in 41 market areaslocated in 14 states in the United States (the “U.S.”) and two Canadianprovinces.

 

***Note 2.   Significant Accounting Policies***

 

**Basis of Presentation**

 

Theaccounting and reporting policies of the Company conform to accountingprinciples generally accepted in the United States of America (“U.S. GAAP”).  Certain reclassifications have been made toprior year amounts to conform to the current year’s presentation.  Customer acquisition costs of $22.3 million,$15.3 million and $19.6 million were reclassified from investing activities tooperating activities on the consolidated statements of cash flows for the fiscalyears ended June 30, 2010, 2009 and 2008, respectively.

 

**Principles of Consolidation**

 

TheCompany owns 100% of all of its subsidiaries. Accordingly, the consolidated financial statements include the accountsof Holdings and all of its subsidiaries. Intercompany accounts and transactions have been eliminated inconsolidation.

 

**Use of Estimates and Assumptions**

 

Thepreparation of financial statements in accordance with U.S. GAAP requiresmanagement to make estimates and assumptions that affect amounts reported inthe consolidated financial statements and accompanying notes.  Estimates used in connection with revenuerecognition, fair value measurements, allowance for doubtful accounts,valuation of goodwill and other intangible assets, tax-related reserves andshare-based compensation are often complex and may significantly impact theamounts reported for those items. Although management uses its best judgment based on informationavailable at the time such judgments are made, actual results could differ fromestimated amounts.

 

**Revenue Recognition**

 

***Sales of Natural Gas and Electricity***

 

Revenuesfrom the sale of natural gas and electricity are recognized in the period inwhich customers consume the commodity. Sales of natural gas and electricity are generally billed by the localdistribution companies (“LDCs”), acting as the Company’s agent, on a monthlycycle basis, although the Company performs its own billing for certain of itsmarket areas.  The billing cycles forcustomers do not coincide with the accounting periods used for financialreporting purposes.  The Company followsthe accrual method of accounting for revenues whereby revenues applicable tonatural gas and electricity consumed by customers, but not yet billed under thecycle billing method, are estimated and accrued along with the related costs,and included in operations.  Suchestimates are refined in subsequent periods upon obtaining final informationfrom the LDC.  Changes in these estimatesare reflected in operations in the period in which they are refined.

*** ***

***Passthrough Revenues***

 

Revenuesinclude certain “passthrough” revenues, which represent transportation chargesbilled to customers by certain LDCs. These revenues are offset by corresponding amounts in cost of goods soldfor amounts billed to the Company by the LDC.

 

***Fees Charged to Customers***

 

Variousfees charged to customers, such as late payment fees, early contracttermination fees, service shut-off fees and fees charged to customers forproviding copies of bills, are generally recorded as revenue when collection isdeemed to be reasonably assured.  Latepayment fees charged in all markets, and various other fees charged in certainmarkets are recorded as revenue when billed to the customer.  Certain other fees are recorded as revenuewhen actually collected from the customer.

 

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***Deferred Revenue***

 

Customerswho are on budget-billed plans pay for their natural gas or electricity atratable monthly amounts, based on estimated annual usage, while the Companyrecords revenue when the customer consumes the commodity.  The cumulative difference between actualusage for these customers and the budget-billed amount actually invoiced, netof cash payments made by the customers, is equal to the net budget-billedvariance.  If the net budget-billedvariance is a receivable from the customer at the balance sheet date,indicating that the customer’s actual usage has exceeded amounts billed to thecustomer, the amount is reported as accounts receivable in the consolidatedbalance sheets.  If the net budget-billedvariance is a liability to the customer, indicating that amounts billed haveexceeded actual usage, the amount is reported as deferred revenue in theconsolidated balance sheets.

 

***Sales Incentives***

 

Cashrebates paid to customers under the terms of certain product agreements arerecorded as a reduction of sales revenue. Non-cash incentives, such as free products or services, are recorded asmarketing expenses.

 

***Collections of Sales Tax***

 

Salestax is added to customer bills for many of the markets served by theCompany.  Sales tax collected fromcustomers on behalf of governmental entities is recorded on a net basis.  Such amounts are excluded from the Company’srevenues and are recorded in accounts payable and accrued liabilities on theconsolidated balance sheets until they are remitted to the appropriategovernmental entities.

 

**Fair Value of Financial Instruments**

 

Thefair value of a financial instrument is the amount at which the instrumentcould be exchanged in a current transaction between willing parties, other thanin a forced or liquidation sale.  Whereavailable, the Company uses quoted market prices as estimates of the fair valueof financial instruments.  For financialinstruments without quoted market prices, fair value represents management’sbest estimate based on a range of methods and assumptions, which are describedbelow.  The use of different assumptionscould significantly affect the estimates of fair value.  Accordingly, the net values realized uponliquidation of the financial instruments could be materially different from theestimated fair values presented.

 

***Short-term Financial Assets and Liabilities***

 

Thecarrying value of certain financial assets and liabilities carried at cost isconsidered to approximate fair value because they are short-term in nature,bear interest rates that approximate market rates and generally have minimalcredit risk.  These items include cashand cash equivalents, restricted cash, accounts receivable, accounts payableand accrued liabilities, deferred revenue and short-term financingarrangements.

 

TheCompany had $0 and $22.1 million invested in money market funds at June 30,2010 and 2009, respectively.  Each shareof the money market funds was valued at $1.00 at June 30, 2009.

 

***Derivatives***

 

Derivativesare recorded at fair value.  Since theCompany has not elected to designate any derivatives as accounting hedges, anychanges in fair value are adjusted through unrealized losses (gains) from riskmanagement activities, net (for commodity derivatives) or interest expense, netof interest income (for interest rate swaps) in the consolidated statements ofoperations, with related outstanding settlement amounts recorded in unrealizedgains asset accounts and unrealized losses liability accounts in theconsolidated balance sheets.

 

Asof June 30, 2010, natural gas, electricity and interest rate derivativeinstruments are generally with a single counterparty under the Company’sCommodity Supply Facility.  The Companygenerally enters into master netting agreements with hedge counterparties****for settlement of derivative fair value assets andliabilities.  The Company records suchfair value assets and liabilities net on the consolidated balance sheets.

 

TheCompany generally utilizes a market approach for its recurring fair valuemeasurements.  In forming its fair valueestimates, the Company utilizes the most observable inputs available for therespective valuation technique.  If afair value measurement reflects inputs from different levels within the fairvalue hierarchy, the measurement is classified based on the lowest level ofinput that is significant to the fair value measurement.  The key inputs and assumptions utilized forthe fair value measurements recorded by the Company are summarized as follows:

 

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***Financial natural gas derivative contracts*** —NYMEX-referenced swaps are valued utilizing unadjusted market commodity quotesfrom a pricing service, which are considered to be quotes from an activemarket, but are deemed to be Level 2 inputs because the swaps are not anidentical instrument to the NYMEX-referenced commodity.  Basis swaps and options are generally valuedusing observable broker quotes.  Other inputsand assumptions include contract position volume, price volatility, commoditydelivery location, credit quality of the Company and of derivativecounterparties, credit enhancements, if any, and time value.

 

***Financial electricity derivative contracts —*** Electricityswaps are valued utilizing market commodity quotes from a pricing service,which are deemed to be observable inputs. Other inputs and assumptions include contract position volume, pricevolatility, commodity delivery location, credit quality of the Company and ofderivative counterparties, credit enhancements, if any, and time value.

 

***Physical forward natural gas and electricity derivative contracts —*** The Companyutilizes market commodity quotes from a pricing service to value theseinstruments, which are deemed to be observable inputs.  Other inputs and assumptions include contractposition volume, commodity delivery location, credit quality of the Company andof derivative counterparties, credit enhancements, if any, and time value.

 

***Interest rate swaps —*** Interest rate swaps arevalued utilizing quotes received directly from swap counterparties.  Key inputs and assumptions include interestrate curves, credit quality of the Company and of derivative counterparties,credit enhancements, if any, and time value.

 

Referto Note 15 of these consolidated financial statements for additionalinformation regarding the fair value of financial instruments.

 

***Long-term Debt***

 

AtJune 30, 2010, long-term debt includes the aggregate outstanding principalamount of Fixed Rate Notes due 2014 and Floating Rate Notes due 2011.  The carrying values of long-term debtinstruments are not necessarily indicative of fair value due to changing marketconditions and terms for similar unsecured instruments.  The Company has elected not to record thesefinancial instruments at fair value at June 30, 2010.  Refer to Note 15 of the consolidatedfinancial statement for additional information regarding the fair value offinancial instruments.

 

**Foreign Currency Translation**

 

TheCompany has Canadian operations that are measured using Canadian dollars as thefunctional currency.  Assets andliabilities are translated into U.S. dollars at the rate of exchange in effecton the balance sheet date.  Income andexpenses are translated at the average daily exchange rate for the month ofactivity.  Net exchange gains or lossesresulting from such translation are included in common stockholders’ equity asa component of accumulated other comprehensive loss.

 

**Cash and Cash Equivalents**

 

TheCompany’s cash and cash equivalents consist primarily of cash on deposit andmoney market accounts.

 

**Restricted Cash**

 

Restrictedcash consists of: (1) cash and money market funds required as security forsurety bonds required by LDCs, utility commissions and pipeline tariffs andregulations at June 30, 2010 and 2009; (2) cash deposits receivedfrom customers as of June 30, 2010 and 2009; (3) cash and moneymarket funds required as security for letters of credit issued under theCompany’s Revolving Credit Facility as of June 30, 2009; and (4) moneymarket funds held in escrow as contingent consideration related to acquisitionsas of June 30, 2009.

 

**Accounts Receivable and Allowance for Doubtful Accounts**

 

TheCompany delivers natural gas and electricity to its customers through LDCs,many of which guarantee amounts due from customers for consumed natural gas andelectricity.  Accounts receivable, netprimarily represents amounts due for commodity consumed by customers, net of anallowance for estimated amounts that will not be collected from customers.  For those markets where accounts receivableare guaranteed by LDCs, the Company pays guarantee discounts that averageapproximately 1% of billed accounts receivable, which are charged to reservesand discounts in the consolidated statements of operations as revenue isbilled.  The Company does not maintain anallowance for doubtful accounts related to accounts receivable in guaranteedmarkets, as it does not expect to incur material credit losses from any of therespective LDCs.

 

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Inmarkets where no LDC guarantees exist, the Company calculates and records anallowance for doubtful accounts based on aging of accounts receivable balances,collections history, past loss experience and other current economic or othertrends.  Charge offs of accountsreceivable balances are recorded as reductions of the allowance for doubtfulaccounts during the month when the accounts are transferred to outsidecollection agencies.  Delinquency statusfor customer accounts is based on the number of days an account balance isoutstanding past an invoice due date. Accounts are generally reviewed for transfer to collection agencies by120 days from the initial invoice date.  Recoveriesof accounts receivable balances previously charged off are recorded whenreceived as reductions from reserves and discounts in the consolidatedstatements of operations.  Adjustments tothe allowance for doubtful accounts are recorded in reserves and discounts inthe consolidated statements of operations.

 

Accountsreceivable also includes cash imbalance settlements that represent the value ofexcess natural gas delivered to LDCs for consumption by our customers andactual customer usage.   The Companyexpects such imbalances to be settled in cash in accordance with contractualpayment arrangements.  The Company bearscredit risk related to imbalance settlement receivables to the extent that suchLDCs are unable to collect imbalance settlements payable to them by otherretail marketers.  The Company records anallowance for doubtful accounts during the month that full collection of anysuch imbalance receivable balance becomes doubtful, with a corresponding chargeto reserves and discounts.

 

**Natural Gas Inventories**

 

Naturalgas inventories are valued at the lower of cost or market value on aweighted-average cost basis.  Theweighted-average cost of inventory includes related transportation and storagecosts.  Natural gas inventories alsoinclude estimated commodity delivery/usage imbalance settlement amounts thatrepresent natural gas to be transferred to the Company from various thirdparties within the upcoming twelve-month period.

 

Adjustmentsto the value of natural gas inventories on the consolidated balance sheetsresult in corresponding adjustments to cost of goods sold on the consolidatedstatements of operations.  Suchadjustments result from changes in inventory storage levels as natural gas isdelivered to customers as well as changes in the weighted average cost ofnatural gas in storage.

 

**Other Current Assets**

 

Othercurrent assets primarily include: (1) security deposits placed withcommodity and other suppliers as collateral for future purchases in lieu ofletters of credit or other credit enhancements; and (2) prepaid expensesand deferred charges, which include costs incurred that pertain to futurebenefit periods not exceeding twelve months. These costs are amortized to appropriate expense lines on theconsolidated statement of operations over their estimated benefit period.

 

**Business Combinations and Goodwill**

 

Sinceits organization in 1999 and through June 30, 2009, the Company acquiredthe natural gas and electricity operations of numerous energy companies, eachof which was recorded as a purchase business combination.  For all purchase business combinationsrecorded through June 30, 2009, the purchase price was allocated to thenet assets acquired based on their estimated fair values at the acquisitiondate.  Costs incurred to effect thepurchase business combination transaction (e.g., legal, accounting, valuationand other professional or consulting fees) were added to the costs of theacquisition and allocated accordingly to the net assets acquired.  Certain intangible assets, such as customeracquisition costs and goodwill, were recorded as a result of purchase businesscombinations to the extent that the purchase price exceeded the values assignedto identifiable net assets.  The initialpurchase price allocation was reviewed and adjusted for a period of twelvemonths subsequent to the acquisition date as new or revised information becameavailable.

 

TheCompany has determined that its natural gas and electricity reporting unitscorrespond with its business segments for management and financial reportingpurposes.

 

EffectiveJuly 1, 2009, assets acquired and liabilities assumed for purchasebusiness combinations, if any, are recorded at their estimated fair values,regardless of their cost.  Costs incurredto effect such transactions are recognized separately from the acquisitiontransaction and generally are expensed during the periods in which the costsare incurred and the services are received. Restructuring costs that the Company was not obligated to incur are alsorecognized separately from the purchase business combination transaction.

 

Asof June 30, 2009, goodwill of $3.8 million represents the excess ofpurchase price over the fair value of identifiable natural gas net assetsacquired from Shell Energy Services Company L.L.C. (“SESCo”) inAugust 2006.   The Company assignedthis goodwill to its natural gas business segment.  Goodwill is not amortized, but rather isreviewed for impairment at least annually or more frequently if events orchanges in circumstances indicate that the carrying amount may not berecoverable.  Goodwill is tested forimpairment annually at June 30.  TheCompany utilizes a combination of methods to estimate the fair value of itsnatural gas reporting unit, including a discounted cash flows methodology fornear-term 

 

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estimableearnings and a discounted multiple of earnings methodology to estimate aterminal value.  Critical assumptionsused for the fair value model include:

 

·                  earnings forecasts for the natural gasbusiness segment for fiscal years 2011 through 2014, which reflect assumptionsfor growth in natural gas RCEs (net of attrition), expected gross profit andexpense trends;

·                  a terminal value multiple; and

·                  the discount rate used to calculate thepresent value of future cash flows.

 

**Customer Acquisition Costs, Net**

 

TheCompany capitalizes costs associated with the acquisition of customers to theextent that they are incremental direct costs and that such costs can berecovered from the future economic benefit resulting from the customerrelationship.  The Company acquirescustomers as a result of the following activities:

 

·                  bulk acquisitions and business combinations;

·                  payments to third-party contractors forsuccess-based marketing activities;

·                  payments to third-party contractors forhourly paid direct-response telemarketing activities.

 

Customerportfolios acquired through asset purchase acquisitions and businesscombinations are recorded at their allocated purchase price and amortized on astraight-line basis over the estimated life of the customers acquired.  The Company currently estimates a three-yearlife for these assets.  For customerportfolios acquired prior to July 1, 2009, the Company adjusts theacquisition cost for contingent consideration paid subsequent to theacquisition date in accordance with the terms of the respective acquisitionagreement.    The Company last acquired acustomer portfolio in October 2008.

 

Success-basedmarketing costs are incremental direct costs incurred and paid by the Companyin connection with arrangements with third-party contractors.  These costs represent customer contractorigination fees paid to third party contractors for each customer that isapproved and confirmed as a new customer. The Company currently amortizes these assets over their estimatedthree-year life.

 

Hourlypaid direct-response telemarketing costs are incremental direct costs incurredand paid by the Company in connection with arrangements with third-partycontractors.  These contractors are paidon an hourly basis with the expectation that they originate an agreed-uponminimum average number of new customers for every hour worked.  Hourly paid direct-response telemarketingcosts are capitalized by the Company to the extent that:

 

·                  there is a direct relationship between theacquisition of a customer and the cost being deferred;

·                  the purpose of the hourly paid telemarketingprogram is to elicit direct responses from customers in the form of sales inconnection with customer contracts; and

·                  it is probable the deferred costs will berecovered from the future economic benefit resulting from the customerrelationship.

 

Hourlypaid direct-response telemarketing costs are amortized over the period duringwhich the future economic benefits are expected to be realized.  The Company currently estimates a three-yearbenefit period for these assets.

 

Amortizationof customer acquisition costs is included in depreciation and amortization onthe consolidated statement of operations.

 

Thefollowing costs are expensed as incurred by the Company, and are included inadvertising and marketing expenses on the consolidated statement of operations:

 

·                  administrative costs, occupancy costs or thecost of various advertising media, such as radio advertising, print advertisingand billboards, that can not be associated directly with customer generation;

·                  fees paid for lead generation or any otheractivity that does not result in generation of confirmed customers; and

·                  costs incurred to renew or extend the term ofcustomer contracts.

 

**Fixed Assets, Net**

 

Fixedassets consist primarily of computer hardware and software, office equipmentand furniture.  Fixed assets are statedat cost on the consolidated balance sheets, less accumulated depreciation.  Depreciation is recorded on a straight-linebasis over the estimated useful lives of the related assets, which generallyrange from three to five years.  Depreciationexpense is reported in depreciation and amortization on the consolidatedstatements of operations.  Costs ofmaintenance and repairs to 

 

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fixedassets are generally expensed as incurred, and reported in general andadministrative expenses on the consolidated statements of operations.

 

**Capitalized Software Costs**

 

TheCompany capitalizes costs of software acquisition and development projects,including costs related to software design, configuration, coding,installation, testing and parallel processing. Capitalized software costs are recorded in fixed assets, net of accumulatedamortization, on the consolidated balance sheets.  Capitalized software development costsgenerally include:

 

·                  external directcosts of materials and services consumed to obtain or develop software forinternal use;

·                  payroll andpayroll-related costs for employees who are directly associated with and whodevote time to the project, to the extent of time spent directly on theproject;

·                  costs to obtainor develop software that allows for access or conversion of old data by newsystems;

·                  costs ofupgrades and/or enhancements that result in additional functionality forexisting software; and

·                  interest costsincurred while developing internal-use software that could have been avoided ifthe expenditures had not been made.

 

Thefollowing software-related costs are generally expensed as incurred andrecorded in general and administrative expenses on the consolidated statementsof operations:

 

·                  research costs,such as costs related to the determination of needed technology and theformulation, evaluation and selection of alternatives;

·                  costs todetermine system performance requirements for a proposed software project;

·                  costs ofselecting a vendor for acquired software;

·                  costs ofselecting a consultant to assist in the development or installation of newsoftware;

·                  internal orexternal training costs related to software;

·                  internal orexternal maintenance costs related to software;

·                  costsassociated with the process of converting data from old to new systems,including purging or cleansing existing data, reconciling or balancing of datain the old and new systems and creation of new data;

·                  updates andminor modifications; and

·                  fees paid forgeneral systems consulting and overall control reviews that are not directlyassociated with the development of software.

 

Thecosts of computer software obtained or developed for internal use is amortizedon a straight-line basis over the estimated useful life of the software.  Amortization begins when the software and allrelated software modules on which it is functionally dependant are ready fortheir intended use.  Amortization expenseis recorded in depreciation and amortization in the consolidated statements ofoperations.  The Company’s amortizationperiod does not exceed five years for any capitalized software project.

 

Capitalizedsoftware costs are evaluated for recoverability whenever events or changes incircumstances indicate that its carrying amount may not be recoverable,including when:

 

·                  existingsoftware is not expected to provide future service potential;

·                  it is no longerprobable that software under development will be completed and placed inservice; and

·                  costs ofdeveloping or modifying internal-use software significantly exceed expecteddevelopment costs or costs of comparable third-party software.

 

**Income Taxes**

 

TheCompany files a consolidated federal U.S. income tax return that includes allof its consolidated subsidiaries, as well as various U.S. state returns.  For operations in Canada, a Canadian federaltax return is filed, as well as an Ontario provincial return.

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amount of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes using enacted tax rates expected to bein effect for the year in which the temporary differences are expected toreverse.  The Company records a valuationallowance if it is “more likely than not” that the related tax benefits willnot be realized.

 

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**Derivatives and Hedging Activities**

 

***Commodity Derivatives***

 

TheCompany utilizes physical and financial derivative instruments to reduce itsexposure to fluctuations in the price of natural gas and electricity.  Commodity derivatives utilized typicallyinclude, swaps, forwards and options that are bilateral contracts withcounterparties.  In addition, certaincontracts with customers are also accounted for as derivatives.  The Company has not elected to designate anyderivative instruments as hedges under U.S. GAAP guidelines.  Accordingly, any changes in fair value duringthe term of a derivative contract are adjusted through unrealized losses(gains) from risk management activities in the consolidated statements ofoperations with offsetting adjustments to unrealized gains or unrealized lossesfrom risk management activities in the consolidated balance sheets.  Unrealized gains from risk managementactivities on the consolidated balance sheets represent receivables fromvarious derivative counterparties, net of amounts due to the samecounterparties when master netting agreements exist.  Unrealized losses from risk managementactivities represent liabilities to various derivative counterparties, net ofreceivables from the same counterparties when master netting agreementsexist.  Settlements on the derivativeinstruments are realized monthly and are generally based upon the differencebetween the contract price and the settlement price as quoted on the New YorkMercantile Exchange (“NYMEX”) or other published index.

 

Therecorded fair values of derivative instruments reflect management’s bestestimate of market value, which takes into account various factors includingclosing exchange and over-the-counter quotations, parity differentials andvolatility factors underlying the commitments. In addition, the recorded fair values are discounted to reflectcounterparty credit risk and time value of settlement.

 

Asof June 30, 2009, the Company had forward physical contracts to purchasenatural gas and electricity.  Based onthe terms of these agreements, the Company had elected to treat all suchcontracts as “normal purchases” under U.S. GAAP, and therefore the contractswere not reported on the consolidated balance sheets at June 30, 2009.

 

Underthe terms of the Commodity Supply Facility, most of the outstanding physicalforward agreements for the purchase of natural gas, and all physical forwardagreements for the purchase of electricity, were novated to RBS Sempra duringthe fiscal year ended June 30, 2010. Based upon the terms of the ISDA Master Agreements, certain of thesenovated agreements no longer qualify as “normal purchases.”  Since the novation dates of these agreements,changes in fair value have been reflected in earnings and recorded inunrealized gains and/or unrealized losses from risk management activities onthe consolidated balance sheets at June 30, 2010.  These agreements are included in the June 30,2010 fair value measurements reported in Note 15.

 

***Interest Rate Swaps***

 

TheCompany utilizes interest rate swaps to reduce its exposure to interest ratefluctuations related to its credit facility and floating rate debt.  The swaps are fixed-for-floating and settleagainst the six-month LIBOR rate.  Noneof the interest rate swaps has been designated as a hedge, and accordingly,these instruments are carried at fair value on the consolidated balance sheetswith changes in fair value recorded as adjustments to interest expense.

 

**Debt**

 

Debtinstruments are recorded at their face amounts on the consolidated balancesheets, less any discount or plus any premium. Debt that the Company expects to repay within one year is classified asa current liability.

 

***Debt Issue Discounts and Debt Issuance Costs***

 

Debtissue discounts are recorded as decreases to recorded debt balances and areamortized to interest expense over the remaining life of the related debtinstrument.  Certain costs that aredirectly related to the issuance of debt, such as financing transaction fees,underwriting fees, legal fees and other professional services, are deferred andrecorded in other assets on the Company’s consolidated balance sheets andamortized to interest expense over the remaining life of the related debtinstrument.  In the event that debtinstruments are partially or entirely repaid by the Company, a pro rata portionof related discount and debt issue costs are recorded as an increase tointerest expense.

 

***Early Extinguishment of Debt***

 

Duringthe period from August 2006 through June 30, 2009, the Companypurchased approximately $24.8 million in aggregate principal amount of FloatingRate Notes due 2011 from the holders of the notes.  These transactions were recorded 

 

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asearly extinguishments of debt.  Gainsfrom these transactions, which result from the discounts paid by the Companyfor outstanding Floating Rate Notes due 2011, were recorded as adjustments tointerest expense.

 

***Interest Expense***

 

Interestexpense includes:

 

·                  interest incurred for various debtinstruments;

·                  fees incurred for issuance of letters ofcredit and other transactions related to the Company’s supply, hedging andcredit agreements;

·                  amortization of debt issue discount anddeferred debt issue costs; and

·                  changes in the fair market value of interestrate swaps entered into by the Company to economically hedge its floating rateinterest exposure.

 

Interestexpense on the consolidated statements of operations is presented net ofinterest income earned from cash and cash equivalents and restrictedinvestments.

 

**Redeemable Convertible Preferred Stock**

 

AtJune 30, 2009, redeemable convertible preferred stock (the “PreferredStock”) was recorded at its estimated redemption value outside of stockholders’equity on the consolidated balance sheets since it was redeemable at the optionof the holders of the Preferred Stock and it was probable that the PreferredStock became redeemable at June 30, 2009. On September 22, 2009, in connection with the Restructuring, thePreferred Stock was converted into the newly authorized Class C CommonStock.  Refer to Notes 3 and 18 foradditional information regarding Preferred Stock.

 

Adjustmentsto the carrying value of the Preferred Stock to its estimated redemption valuewere recorded as a charge against retained earnings or, in the absence ofretained earnings, by charges against additional paid-in capital.  The $25.9 million excess of the redemptionvalue over the aggregate fair value of common stock issued to the preferredshareholders in connection with the Restructuring was reclassified tostockholders’ equity on the consolidated balance sheets.

 

**Stock Based Compensation**

 

ThroughSeptember 22, 2009, the Company had three stock-based compensation plansin effect, under which stock options to acquire the Company’s common stock weregranted to employees, directors and other non-employees of the Company.  In addition, the Company issued warrants topurchase its common stock to certain employees and non-employees that were notissued under any of its three approved stock-based compensation plans.

 

Forstock option awards granted after June 30, 2006, the Company recognizedcompensation expense prospectively over the vesting period.  Compensation expense for option awardssubject to graded vesting was recognized based on the accelerated attributionmethod as specified under U.S. GAAP guidelines. The fair value of each option award granted subsequent to June 30,2006 was estimated on the grant date using a Black-Scholes-Merton optionvaluation model.  Certain key assumptionsused in the model included share price volatility, expected term, risk-freeinterest rate and expected forfeiture rate. Total compensation expense to be recognized over the vesting period wasbased on: (1) the fair value of the Company’s common stock at thequarterly reporting date immediately prior to the grant date; and (2) thetotal number of options expected to be exercised, net of expectedforfeitures.  The cumulative effect oncurrent and prior periods of a change in the number of options expected to beexercised, net of forfeitures, was recognized in compensation expense in theperiod of the change.

 

Forstock option awards granted to employees prior to June 30, 2006,compensation expense was measured based on the intrinsic value of the stock orstock option at the grant date.  Foroptions granted to employees prior to June 30, 2006, the Company was notrequired to recognize compensation expense during the fiscal years endedJune 30, 2009, 2008 or 2007 because the exercise price for all such awardsequaled or exceeded the estimated fair value of the Company’s common stock atthe grant date.

 

Priorto June 30, 2006, the Company issued warrants to certain employees andnon-employees that permitted the warrant holder the option to:(1) exercise such warrant for cash; or (2) exercise by withholdingthat number of common shares having a total fair value equal to the warrantexercise amount from the total number of common shares that would otherwise havebeen issued upon exercise of the warrant (a “cashless exercise”).  Compensation cost was recorded as expenseover the vesting period of such warrants using the accelerated expenseattribution method.  For these awards, itwas presumed that the employee would elect the cashless exercise andcompensation expense was adjusted periodically to reflect the amount by whichthe estimated current fair value of the Company’s common shares exceeded theexercise price of the warrant (known as “variable plan accounting”).  Increases or decreases in the estimated fairvalue of the Company’s common stock between 

 

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thegrant date and the exercise date resulted in corresponding increases ordecreases, respectively, in compensation expense in the period in which thechange in estimated fair value of common stock occurred.  Accrued compensation for an award that wassubsequently forfeited or cancelled was adjusted by decreasing compensationexpense in the period of forfeiture or cancellation.

 

Inconnection with the Company’s debt and equity restructuring that was completedin September 2009 (the “Restructuring”), the Company terminated its threeexisting stock-based compensation plans and offered cash settlements to holdersof options and warrants in exchange for their agreement to cancel and terminatesuch options and warrants.  Compensationexpense associated with awards under these plans was recorded through September 22,2009.  All outstanding options andwarrants as of June 30, 2009 were cancelled and terminated as of September 22,2009.  Cash settlement payments ofapproximately $0.2 million were recorded as general and administrative expenseduring the fiscal year ended June 30, 2010.

 

InJanuary 2010, Holdings’ Board of Directors authorized the creation of theMXenergy Holdings Inc. 2010 Stock Incentive Plan (the “2010 SIP”), pursuant towhich the Company may issue Class C Common Stock not to exceed 10% ofHoldings’ outstanding common stock (on a fully diluted basis) after givingeffect to the Restructuring.  Also in January 2010,Holdings’ Board of Directors approved grants of restricted stock units (“RSUs”)to certain senior officers, directors and a former director, pursuant to whichthe Company may issue approximately 2.9 million shares of Class C CommonStock, representing 5% of Holdings’ outstanding common stock (on a fullydiluted basis), subject to prescribed vesting requirements.  The grant date fair value of the RSUs isbased on: (1) the number of RSUs granted; (2) the estimated fairvalue of the Company’s Class C Common Stock on the grant date; and theestimated forfeiture rate over the term of the award vesting periods.

 

Sincethe Company’s common stock is not publicly traded, there is noreadily-available market source of information to estimate its fair value.  Therefore, the Company utilizes an internalstock valuation model in order to calculate the grant-date fair value for stock-basedcompensation awards.  At a minimum, theCompany completes the stock valuation model on a quarterly basis, as of September 30th, December 31st, March 31st and June 30th of eachfiscal year.  For the June 30th model, the Company contracts with an independentvaluation company to calculate a fair value at that date.  For the remaining quarter-end valuationdates, the Company utilizes an internal valuation model that closely resemblesthe methodology utilized by the independent valuation company as of theprevious June 30th valuation date.  The grant date stock value assigned tostock-based compensation awards is generally determined from the most recentlycompleted quarter-end valuation model, unless any matters arose during the timebetween the most recent quarter-end model and the grant date that would havehad a material impact on the stock valuation.

 

Keyestimates and assumptions used in the Company’s stock valuation models include:

 

·                  revenue and expense forecasts and assumedearnings multiples based on comparable companies; and

·                  a discount rate applied to the future cashflows assumed to result from future earnings.

 

The Company did not assume any forfeitures of RSUs in its calculationof compensation expense for the fiscal year ended June 30, 2010, since itexpects no forfeitures by directors prior to October 1, 2010, which is thedate on which the RSUs granted to directors will be completely vested withoutlimitations, and no forfeitures by senior managers prior to September 22,2010, which is the date on which the first third of the RSUs granted to seniormanagers will be completely vested without limitations.  The forfeiture rate will be re-evaluated oneach annual vesting date, or if any of the senior managers are terminated.

 

TheRSUs granted in January 2010 are subject to a graded vestingschedule.  Compensation expense isrecognized based on the accelerated attribution method and is recorded ingeneral and administrative expenses in the consolidated statements ofoperations.

 

**Transactions with Related Parties**

 

Fromtime to time in the normal course of business, the Company enters intotransactions with various non-employee related parties for financingarrangements, legal services, financial advisory services and managementservices.  The Company utilizesaccounting practices for these transactions that are consistent with similartransactions with unrelated third parties. Refer to Note 20 of the consolidated financial statements for a summaryof the Company’s related party transactions.

 

***Note 3.   New Accounting Pronouncements***

 

**Accounting Pronouncements AdoptedDuring the Fiscal Year Ended June 30, 2010**

 

InJune 2009, the Financial Accounting Standards Board (the “FASB”) issued Statementof Financial Accounting Standards No. 168, “The FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles — areplacement of FASB Statement No. 162” (“SFAS No. 168”).  Effective for financial statements issued forinterim and 

 

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annualperiods ending after September 15, 2009, the Accounting StandardsCodification (the “ASC”) supersedes all existing accounting and reportingstandards, excluding those issued by the SEC, and is now the single source ofauthoritative U.S. GAAP for entities that are not SEC registrants.  Rules and interpretative releases of theSEC are also sources of U.S. GAAP for SEC registrants.  The Company adopted the provisions of SFAS No. 168effective for the financial statements included in this Form 10-K.  The adoption of SFAS No. 168, ascodified by ASC Topic 105, “Generally Accepted Accounting Principles,” impactedthe Company’s financial statement disclosures, but did not have any effect onits financial position or results of operations.

 

EffectiveJuly 1, 2009, the Company adopted ASC guidelines regarding accounting andreporting for business combinations that are consummated after July 1,2009.  These guidelines include certainchanged principles and requirements related to: (1) recognition andmeasurements of identifiable assets acquired, liabilities assumed, goodwillacquired, any gain from a bargain purchase, and any noncontrolling interest inan acquired company; (2) application issues relating to accounting anddisclosures for assets and liabilities arising from contingencies in a businesscombination; and (3) disclosures regarding business combinations infinancial statements.  The Company willapply the ASC guidelines prospectively to business combination transactionsconsummated after July 1, 2009, if any. The Company did not consummate any business combination transactionsduring the fiscal year ended June 30, 2010.

 

InAugust 2009, the FASB issued Accounting Standards Update No. 2009-05,“Fair Value Measurements and Disclosures” (“ASU 2009-05”).  ASU 2009-05 amends ASC Topic 820, “Fair ValueMeasurements and Disclosures” by providing additional guidance clarifying themeasurement of liabilities at fair value. The amendments prescribed by ASU 2009-05 became effective for theCompany’s quarterly reporting period ending December 31, 2009 and did nothave any impact on the Company’s financial position or results of operations.

 

InFebruary 2010, the FASB issued Accounting Standards Update No. 2010-09,“Subsequent Events (Topic 855) — Amendments to Certain Recognition andDisclosure Requirements” (“ASU 2010-09”). ASU 2010-09 amends ASC Topic 855, “Subsequent Events,” by clarifying thescope of disclosure requirements related to subsequent events.  The amendments prescribed by ASU 2010-09became effective for the Company’s quarterly reporting period ending March 31,2010 and did not have any impact on the Company’s financial position or resultsof operations.  Refer to Note 25 fordisclosures regarding subsequent events.

 

InJanuary 2010, the FASB issued Accounting Standards Update No. 2010-06(“ASU 2010-06”), which amends FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”  The amended guidance in ASU 2010-06 requiresentities to disclose additional information regarding assets and liabilitiesthat are transferred between levels of the fair value hierarchy.  ASU 2010-06 also requires that required Level3 disclosures regarding purchases, sales, issuances and settlements be reportedon a gross basis.  ASU 2010-06 clarifiesexisting guidance pertaining to the level of disaggregation at which fair valuedisclosures should be made and the requirements to disclose information aboutthe valuation techniques and inputs used in estimating Level 2 and Level 3 fairvalue measurements.  The amended guidancein ASU 2010-06 pertaining to disclosure of transfers between levels of the fairvalue hierarchy, the level of disaggregation of disclosures and disclosure ofvaluation techniques and inputs used in estimating Level 2 and Level 3measurements became effective and were adopted for the Company’s quarterly reporting period ending March 31,2010.

 

Therequirement to disclose Level 3 purchases, sales, issuances and settlements ona gross basis will become effective for fiscal years (and for interim periodswithin those fiscal years) beginning after December 15, 2010.  TheCompany intends to adopt these provisions effective for its quarterly reportingperiod ending September 30, 2011.

 

***Note 4.   Debt and Equity Restructuring***

 

OnSeptember 22, 2009, the Company completed the Restructuring, whichincluded a number of transactions and amendments to corporate documents.

 

**Amendmentand Restatement of Corporate Documents**

 

OnSeptember 22, 2009, the Company’s Certificate of Incorporation and Bylawswere amended and restated, and the Company entered into new stockholderagreements with holders of various classes of newly authorized commonstock.  Effective July 27, 2010, theCompany’s Certificate of Incorporation and Bylaws were further amended andrestated and the stockholders agreement among holders of all classes of commonstock dated September 22, 2009 (the “Stockholders Agreement”) wasamended.  The amended and restatedCertificate of Incorporation dated September 22, 2009 authorized issuanceof new classes of common stock and changed the size and composition of theCompany’s board of directors (the “Board of Directors”).  The amended and restated Certificate ofIncorporation dated July 27, 2010 adjusts director and committee membercompensation, reduces the number of committees of the board of directors andrevises the definitions of “Financial Expert” and “Independent Director.”  Refer to Note 19 for additional informationregarding the Company’s common stock and Board of Directors.

 

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**Exchangeof Floating Rate Notes due 2011 for Cash, Fixed Rate Notes due 2014 and Class ACommon Stock**

 

TheRestructuring included a debt exchange transaction that was accounted for as atroubled-debt restructuring in accordance with U.S. GAAP, and therefore did notresult in any gain or loss recorded in the consolidated statements of operations.

 

OnSeptember 22, 2009, the Company exchanged $158.8 million aggregateprincipal amount of outstanding Floating Rate Notes due 2011 for $26.7 millionof cash, $67.8 million aggregate principal amount of 13.25% Senior SubordinatedSecured Notes due 2014 (the “Fixed Rate Notes due 2014”) and 33,940,683 sharesof newly authorized Class A Common Stock. In addition, $9.0 million was transferred from unrestricted cash to anescrow account (the “Fixed Rate Notes Escrow Account”), which is maintained as securityfor future interest payments to holders of the Fixed Rate Notes due 2014.

 

Referto Note 17 for additional information regarding the Fixed Rate Notes due 2014and the Floating Rate Notes due 2011.

 

**NewMaster Supply and Hedge Facility**

 

Asof June 30, 2009, the Company relied on the following credit, commodityhedging and commodity supply arrangements for operation of its natural gas andelectricity businesses:

 

·                  A credit facility (the “Revolving CreditFacility”) that was used primarily to post letters of credit required toeffectively operate within the markets that the Company serves;

·                  A hedge facility (the “Hedge Facility”) thatwas used as the Company’s primary facility to economically hedge variability inthe cost of natural gas;

·                  Commodity derivative arrangements withvarious counterparties were used to economically hedge variability in the costof electricity; and

·                  Arrangements with numerous commodity suppliersto supply the natural gas and electricity necessary for customer consumption inthe markets that the Company serves.

 

EffectiveSeptember 22, 2009 the Revolving Credit Facility and Hedge Facility werereplaced by a new exclusive credit, supply and commodity hedging agreement (the“Commodity Supply Facility”) with Sempra Energy Trading LLC (“RBS Sempra”),which replaced the separate credit, hedging and supply arrangements describedabove.  As a result of termination of theRevolving Credit Facility, $75.0 million of restricted cash held as collateralfor obligations under the Revolving Credit Facility was released tounrestricted cash, which was used by the Company to fund various cash outlaysin connection with the Restructuring.

 

Referto Note 16 for additional information regarding the Commodity Supply Facility.

 

**Conversionof Redeemable Convertible Preferred Stock to Class C Common Stock**

 

Asof June 30, 2009, the Company had 1,451,310 shares of Preferred Stockoutstanding, which was recorded at its estimated redemption value of $54.6million on the consolidated balance sheets. On September 22, 2009, all outstanding shares of Preferred Stockwere exchanged for 11,862,551 shares of newly authorized Class C CommonStock.  Refer to Note 18 for additionalinformation regarding the Preferred Stock.

 

**Repaymentand Termination of the Credit Agreement with Denham Commodity Partners Fund LP**

 

Asof June 30, 2009, the Company had a $12.0 million outstanding balanceunder a credit agreement with Denham Commodity Partners LP (the “Denham CreditFacility”).  On September 22, 2009,all amounts previously borrowed were repaid and the Denham Credit Facility wasterminated.  Refer to Note 20 foradditional information regarding the Denham Credit Facility.

 

**Repaymentand Termination of Bridge Financing Loans**

 

Inconnection with the Revolving Credit Agreement, Charter Mx LLC, Denham and fourmembers of the Company’s senior management team agreed to provide BridgeFinancing Loans in an aggregate amount of $10.4 million by becoming lenders ina new bridge loan tranche under the Revolving Credit Agreement.  The Bridge Financing Loan from Charter Mx LLCwas repaid, with accrued interest, in April 2009.  The Bridge Financing Loans from all otherlenders were repaid, with accrued interest, in connection with theRestructuring.  Refer to Note 20 foradditional information regarding the Bridge Financing Loans.

 

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** **

**Settlementand Cancellation of Outstanding Stock Options and Warrants**

 

Asof June 30, 2009, the Company had options and warrants outstanding whichwere, or may be, exercisable for 1,008,770 shares of common stock.  The vast majority of these options and all ofthe warrants were “out of the money” as of the consummation date of theRestructuring (e.g., the agreed-upon price for which the option/warrant holdermay purchase the Company’s common stock exceeded the current fair value of thecommon stock).  In connection with theRestructuring, the Company terminated its existing share-based compensationplans and offered a cash settlement to holders of options and warrants tocancel and terminate such options and warrants. Refer to Note 19 for additional information regarding equity-basedincentive plans.

 

**NewEquity Incentive Plan and Bonuses**

 

In connection with theRestructuring, the shareholders agreed to create a new equity-basedincentive plan, pursuant to which the Company may issue Class C CommonStock not to exceed 10% of Holdings’ outstanding common stock (on a fullydiluted basis) after giving effect to the Restructuring.  In January 2010, Holdings’ Board of Directorsauthorized a new plan and approved grants of RSUs to certain senior officers,directors and a former director.  Referto Note 19 for additional information regarding equity-based incentive plans.

 

**OtherRestructuring Activity**

 

Inconnection with various Restructuring transactions, the Company incurred $6.4million of legal, consulting and other fees that were recorded as deferred debtissuance costs ($6.1 million) and stock issuance costs that were recorded as areduction of additional paid in capital ($0.3 million).  The deferred debt issue costs will beamortized as an increase to interest expense over the remaining terms of therelated agreements.

 

TheCompany also recorded approximately $2.2 million of incremental, non-recurringexpenses, including:

 

·      Upon completion of the Restructuring, theCompensation Committee of the Board of Directors approved a total bonus pool ofapproximately $0.8 million, which was paid to 19 of the Company’s executiveofficers and employees, including the Company’s chief executive officer andchief financial officer.  These bonuseswere included in general and administrative expenses during fiscal year 2010.

·      The Company incurred approximately $0.2 million ofseverance costs, included in general and administrative expenses during fiscalyear 2010, which related to certain employees terminated in September 2009as part of an initiative to streamline the Company’s organizational structureand control operating costs; and

·      The Company incurred approximately $1.2 million ofprofessional fees, included in general and administrative expenses duringfiscal year 2010, in connection with various potential liquidity eventsconsidered during fiscal year 2009 and the first three months of fiscal year2010.

 

***Note 5.******  ******Seasonality of Operations***

 

Naturalgas and electricity sales accounted for approximately 82% and 18%,respectively, of the Company’s total sales for the fiscal year ended June 30,2010.  The majority of natural gascustomer consumption occurs during the months of November throughMarch.  By contrast, electricity customerconsumption peaks during the months of June through September.  Because the natural gas business segmentcomprises such a large component of the Company’s overall business operations,operating results for the second and third fiscal quarters represent the vastmajority of operating results for the Company’s full fiscal year.

 

Cashcollections from the Company’s natural gas customers peak in the spring of eachcalendar year, while cash collections from electricity customers peak in latesummer and early fall.  The Companyutilizes a considerable amount of cash from operations to meet working capitalrequirements during the months of November through March of eachfiscal year.  In addition, the Companyutilizes considerable cash to purchase natural gas inventories during themonths of April through October.

 

Weatherconditions have a significant impact on customer demand and market prices fornatural gas and electricity.  Customerdemand exposes the Company to a high degree of seasonality in sales, cost ofsales, billing and collection of customer accounts receivable, inventoryrequirements and cash flows.  Inaddition, budget billing programs and payment terms of LDCs can cause timingdifferences between the billing and collection of accounts receivable and therecording of revenues.

 

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Theimpact of rapidly rising or falling commodity prices also varies greatlydepending on the period of time in which they occur during the Company’s fiscalyear.  Although commodity price movementscan have material short-term impacts on monthly and quarterly operatingresults, the Company’s economic hedging and contract pricing strategies aredesigned to reduce the impact of such trends on operating results for a fullfiscal year.  Therefore, the short-termimpacts of changing commodity prices should be considered in the context of theCompany’s entire annual operating cycle.

 

***Note 6.******  ******Accounts Receivable, Net***

 

Accountsreceivable, net is summarized in the following table.

** **
| ** **                                                 | ** ** | **Balances at June 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                 | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| ** **                                                 | ** ** | **(in thousands)**                 | ** ** |
| Billed customer accounts receivable:                       |       |                                    |       |   |   |
| Guaranteed by LDCs                                         | ** ** | **$**                                   | **11,736** |   | $ | 7,768 |   |
| Non-guaranteed by LDCs                                     | ** ** | **21,543**                              |       | 26,679 |   |
| ** **                                                 |       | **33,279**                              |       | 34,447 |   |
| Unbilled customer accounts receivable (1):                 |       |                                    |       |   |   |
| Guaranteed by LDCs                                         | ** ** | **10,206**                              |       | 5,737 |   |
| Non-guaranteed by LDCs                                     | ** ** | **7,211**                               |       | 10,547 |   |
|                                                       | ** ** | **17,417**                              |       | 16,284 |   |
| Total customer accounts receivable                         | ** ** | **50,696**                              |       | 50,731 |   |
| Less: Allowance for doubtful accounts                      | ** ** | **(5,074**                              | **)**      | (7,344 | ) |
| Customer accounts receivable, net                          | ** ** | **45,622**                              |       | 43,387 |   |
| Cash imbalance settlements and other receivables,  net (2) | ** ** | **3,303**                               |       | 4,211 |   |
| Accounts receivable, net                                   | ** ** | **$**                                   | **48,925** |   | $ | 47,598 |   |

 

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(1)   Unbilled customer accountsreceivable represents estimated revenues associated with natural gas andelectricity consumed by customers but not yet billed under the monthly cyclebilling method utilized by LDCs.

(2)   Cash imbalance settlementsrepresent differences between natural gas delivered to LDCs for consumption bythe Company’s customers and actual customer usage.  The Company expects such imbalances to besettled in cash within the next 12 months in accordance with contractualpayment arrangements with the LDCs.

 

TheCompany operates in 41 market areas located in 14 U.S. states and two Canadianprovinces.  The Company’s diversifiedgeographic coverage mitigates the credit exposure that could result fromconcentrations in a single LDC territory or a single regulatory jurisdiction,from extreme local weather patterns or from an economic downturn in any singlegeographic region.

 

TheCompany has limited exposure to risk associated with high concentrations ofsales volumes with individual customers. In April 2010, the Company began delivering natural gas to an LDCin Ohio as part of a new Standard Service Offer program (the “SSO Program”;refer to Note 22 for additional information). As a result of the Company’s participation in the SSO Program, the LDCin Ohio became the Company’s largest single customer during fiscal year 2010,accounting for approximately 3.6% of the Company’s natural gas sales volume.

 

Theallowance for doubtful accounts represents the Company’s estimate of potentialcredit losses associated with customer accounts receivable in markets wheresuch receivables are not guaranteed by LDCs. The Company assesses the adequacy of its allowance for doubtful accountsthrough review of the aging of customer accounts receivable and generaleconomic conditions in the markets that it serves.  Based upon this review as of June 30,2010, and for the fiscal year then ended, the Company believes that itsallowance for doubtful accounts is adequate to cover potential credit lossesrelated to customer accounts receivable. An analysis of the allowance for doubtful accounts is provided in thefollowing table.

 
| ** **                                                                                                         | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2010**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                                         | ** ** | **(in thousands)**                            | ** ** |
| **Allowance for doubtful  accounts:**                                                                              |       |                                               |       |   |   |   |   |
| Balance at beginning of period                                                                                     | ** ** | **$**                                              | **7,344**  |   | $ | 5,154 |   | $ | 5,259 |   |
| Add: Provision for doubtful accounts                                                                               | ** ** | **5,164**                                          |       | 12,009 |   | 5,050 |   |
| Less: Net charge offs of customer accounts  receivable                                                             | ** ** | **(7,434**                                         | )          | (9,819 | ) | (5,155 | ) |
| Balance at end of period                                                                                           | ** ** | **$**                                              | **5,074**  |   | $ | 7,344 |   | $ | 5,154 |   |
|                                                                                                               |       |                                               |       |   |   |   |   |
| Allowance for doubtful accounts as a percentage of  total customer accounts receivable in non-guaranteed markets   | ** ** | **17.6**                                           | %          | 19.7 | % | 9.7 | % |
| Provision for doubtful accounts as a percentage of  sales of natural gas and electricity in non-guaranteed markets | ** ** | **1.79**                                           | %          | 2.79 | % | 1.19 | % |

 

Reservesand discounts in the consolidated statements of operations includes theprovision for doubtful accounts related to

 

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customeraccounts receivable within markets where such receivables are not guaranteed byLDCs as well as discounts related to customer accounts receivable that areguaranteed by LDCs.  For the fiscal yearended June 30, 2010, approximately 51% of the Company’s total sales ofnatural gas and electricity were within markets where LDCs do not guaranteecustomer accounts receivable while 49% of total sales were within markets whereLDCs guarantee customer accounts receivable at a weighted average discount rateof approximately 1%.  Such discount isthe cost to guarantee the customer accounts receivable.  In markets where the LDC guarantees customeraccounts receivable, the Company is exposed to the credit risk of the LDC,rather than that of its customers.  TheCompany monitors the credit ratings of LDCs and the parent companies of LDCsthat guarantee customer accounts receivable. The Company also periodically reviews payment history and financialinformation for LDCs to ensure that it identifies and responds to anydeteriorating trends.  As of June 30,2010, all of the Company’s customer accounts receivable in LDC-guaranteedmarkets were with LDCs with investment grade credit ratings.

 

Thelower provision for doubtful accounts during fiscal year 2010 was primarily dueto the following factors:

 

·      Sales of natural gas and electricity in marketswhere customer accounts receivable are not guaranteed by LDCs decreased 33%during fiscal year 2010, as compared with the same period in the prior fiscalyear;

·      The aging of the Company’s customer accountsreceivable deteriorated in certain of its larger markets in Georgia, Texas andthe northeastern U.S. during fiscal year 2009, which resulted in charge-offs ofcustomer accounts receivable and provisions for doubtful accounts for thosemarkets that were higher than historical levels.  Credit environments have generally stabilizedin these markets during fiscal year 2010;

·      The company’s acquisition of Catalyst Natural Gas,LLC in October 2008 resulted in higher reserves against customer accountsreceivable deemed uncollectible and incremental charge-offs of customeraccounts receivable, which contributed to a higher provision for doubtfulaccounts in the Company’s Georgia natural gas market during fiscal year 2009and the first quarter of fiscal year 2010. There were no purchase acquisitions of customer accounts during fiscalyear 2010 that resulted in incremental charge-offs or provisions for doubtfulaccounts; and

·      During fiscal year 2009, the Company initiated morestringent credit standards for its new and existing customers, which resultedin generally higher credit quality in its customer portfolio during fiscal year2010.

 

***Note 7.******  ******Natural Gas Inventories***

 

Naturalgas inventories are summarized in the following table.

 
| ** **                                  | ** ** | **Balances at June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **(in thousands)**                 | ** ** |
|                                        |       |                                    |       |   |   |
| Storage inventory for delivery to customers | ** ** | **$**                                   | **9,956**  | ** ** | **$** | 24,457 | ** ** |
| Imbalance settlements in-kind (1)           | ** ** | **5,905**                               |       | 4,958 |   |
| Total                                       | ** ** | **$**                                   | **15,861** |   | $ | 29,415 |   |

 

----

(1)   Represents inventory to betransferred to the Company or its customers from LDCs as a result of an excessof natural gas deliveries over amounts used by customers in prior periods.   The company expects these inventories to betransferred to the Company or its customers within the upcoming twelve-monthperiod.

 

Thevolume of natural gas held in storage decreased 63% from 4,900,000 millionBritish thermal units (“MMBtus”) at June 30, 2009 to 1.8 million MMBtus atJune 30, 2010.  Prior to theRestructuring, the Company managed storage capacity for its natural gasinventory.  During the months of April throughOctober, the Company traditionally purchased natural gas to be held in naturalgas inventory until such inventory was transported to LDCs for distribution tothe Company’s customers during the winter months.  Natural gas inventories recorded on theconsolidated balance sheets at June 30, 2009 included this activity.

 

In connection with theCommodity Supply Facility, the Company released a substantial portion of itsstorage capacity to RBS Sempra during the fiscal year ended June 30,2010.  The Company enters into physicalforward contracts to purchase a similar quantity of natural gas from RBS Sempraduring the winter months, at a cost that will approximate the cost to theCompany had it retained that storage capacity. As of June 30, 2010, the Company had entered into physical forwardcontracts to purchase approximately 4.3 million MMBtus of natural gas from RBSSempra.

 

Theweighted-average cost per MMBtu of natural gas held in storage increased 9%from June 30, 2009 to June 30, 2010, which partially offset theimpact of lower volume of natural gas held in storage by the Company.

 

***Note 8.******  ******Goodwill***

 

Allof the Company’s goodwill is assigned to the natural gas business segment.  The Company tests its goodwill for impairmentannually at June 30.  Materialevents, transactions and changes in circumstances are also evaluated for their 

 

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impacton the fair value of the natural gas business segment and the recorded value ofgoodwill.  During the fiscal year ended June 30,2010, the Company evaluated the impacts of various transactions consummated inconnection with the Restructuring and concluded that they did not have anyimpact on the recorded carrying value assigned to goodwill.

 

TheCompany completed its annual impairment test of goodwill as of June 30,2010 and determined that the fair value of the natural gas reporting unitexceeded its carrying value.  As aresult, no impairment loss was required to be recognized.  Since the testing date, there were nomaterial events, transactions or changes in circumstances that warrantedconsideration for their impact on the recorded carrying value assigned togoodwill.

 

***Note 9.******  ******Customer Acquisition Costs, Net***

 

Customeracquisition costs and related accumulated amortization are summarized in thefollowing tables.

 
| ** **                                                         | ** ** | **Balance at June 30, 2010** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **Gross  Book Value**                       | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| ** **                                                         | ** ** | **(in thousands)**                          | ** ** |
| **Customer contracts acquired  from:**                             |       |                                             |       |   |   |   |   |
| Asset acquisitions and business combinations (1)                   |       | $                                                | 8,196      |   | $ | 6,424 |   | $ | 1,772 |   |
| Success-based third-party marketing activities                     |       | 42,010                                           |       | 17,237 |   | 24,773 |   |
| Hourly-paid, third-party direct-response  telemarketing activities |       | 13,261                                           |       | 9,381 |   | 3,880 |   |
| Totals                                                             |       | $                                                | 63,467     |   | $ | 33,042 |   | $ | 30,425 |   |

 
| ** **                                                        | ** ** | **Balance at June 30, 2009** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                        | ** ** | **Gross  Book Value**                       | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**                          | ** ** |
| **Customer contracts acquired  from:**                            |       |                                             |       |   |   |   |   |
| Asset acquisitions and business combinations (1)                  |       | $                                                | 48,832     |   | $ | 42,553 |   | $ | 6,279 |   |
| Success-based third-party marketing activities                    |       | 24,438                                           |       | 8,620 |   | 15,818 |   |
| Hourly-paid third-party direct-response  telemarketing activities |       | 16,306                                           |       | 10,453 |   | 5,853 |   |
| Totals                                                            |       | $                                                | 89,576     |   | $ | 61,626 |   | $ | 27,950 |   |

 

----

(1)   Includes the fair value of customer portfoliosacquired in transactions accounted for as asset acquisitions or businesscombinations.  Also includes contingentconsideration paid by the Company subsequent to the acquisition date inaccordance with the respective acquisition agreements.

 

Amortizationexpense relating to capitalized customer acquisition costs was approximately$19.8 million, $29.8 million and $23.4 million for the fiscal years endedJune 30, 2010, 2009 and 2008, respectively.  Amortization expense associated with customeracquisition costs capitalized as of June 30, 2010 is expected toapproximate $17.0 million, $9.0 million and $4.4 million for the fiscal yearsending June 30, 2011, 2012 and 2013, respectively.

 

Thevalue and recoverability of customer acquisition costs are evaluated quarterlyby comparing their carrying value to their projected future cash flows on anundiscounted basis.  During the fiscalyear ended June 30, 2010, no impairment was indicated as a result of thesecomparisons.  Additionally, the Companyevaluated the impacts of various transactions consummated in connection withthe Restructuring and concluded that they did not have any impact on therecorded carrying value assigned to customer acquisition costs.

 

Asof June 30, 2010, the weighted-average remaining amortization period forcustomer acquisition costs is approximately 1.6 years.

 

***Note 10.******  ******Fixed Assets, Net***

 

Fixedassets, net are summarized in the following table.

 

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| ** **                                      | ** ** | **Balance at June 30,** | ** ** | **Estimated  Useful** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|-----------------------|------------|
| **Fixed Asset Category**              | ** ** | **2010**                               | ** ** | **2009**              | ** ** | **Lives** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                | ** ** | ** **            | ** ** |
|                                            |       |                                   |       |                  |       |   |   |
| Computer equipment                              | ** ** | **$**                                  | **6,381**  |                  | $          | 6,080 |   | 3 years |   |
| Computer software and development               | ** ** | **22,273**                             |       | 25,607                |       | 3-5 years |   |
| Office furniture and equipment                  | ** ** | **1513**                               |       | 1,502                 |       | 3-5 years |   |
| ** **                                      | ** ** | **30,167**                             |       | 33,189                |       |   |   |
| Less: accumulated depreciation and amortization | ** ** | **(27,428**                            | **)**      | (29,461               | )          |   |   |
| Fixed assets, net                               | ** ** | **$**                                  | **2,739**  |                  | $          | 3,728 |   |   |   |

 

TheCompany capitalized approximately $1.0 million of software development costsduring the fiscal years ended June 30, 2010 and 2009.  Capitalized software costs related to variousproject designed to reduce the number of software systems utilized to servicecustomer accounts and to enhance the overall capabilities of existingsoftware.  Amortization expense relatingto capitalized computer software costs was approximately $1.8 million, $6.4million and $7.7 million for the fiscal years ended June 30, 2010, 2009and 2008, respectively.

 

Depreciationexpense relating to computer equipment, office furniture and other equipmentwas approximately $0.6 million, $1.4 million and $1.6 million for the fiscalyears ended June 30, 2010, 2009 and 2008, respectively.

 

***Note 11.******  ******Other Current Assets***

 

Othercurrent assets are summarized in the following table.

 
| ** **                                                                       | ** ** | **Balance at**     | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                       | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
| ** **                                                                       | ** ** | **(in thousands)** | ** ** |
| Security deposits:                                                               | ** ** | ** **              | ** ** | ** ** | ** ** |
| Collateral required by hedging counterparties                                    | ** ** | **$**                   | **6,180**  |   | $ | 4,157 |   |
| Collateral posted in connection with the SSO  Program                            | ** ** | **4,569**               |       | — |   |
| Collateral required by transmission, pipeline and  transportation counterparties | ** ** | **3,295**               |       | 5,202 |   |
| Prepaid expenses                                                                 | ** ** | **1,448**               |       | 1,332 |   |
| Other                                                                            | ** ** | **780**                 |       | 1,393 |   |
| Total other current assets                                                       | ** ** | **$**                   | **16,272** |   | $ | 12,084 |   |

 

***Note 12.******  ******Income Taxes***

 

Incometax benefit (expense) is summarized in the following table:

 
| ** **                         | ** ** | **Fiscal Years ended June 30,** | ** **  |
|------------------------------------|------------|-----------------------------------------------------|-------------|
| ** **                         | ** ** | **2010**                                            | ** **  | **2009** | ** ** | **2008** | ** ** |
| ** **                         | ** ** | **(in thousands)**                             | ** **  |
| Current:                           |       |                                                |        |   |   |   |   |
| Federal                            | ** ** | **$**                                               | **5,054**   |   | $ | 4,666 |   | $ | 599 |   |
| State                              | ** ** | **(645**                                            | **)**       | (823 | ) | 434 |   |
| ** **                         | ** ** | **4,409**                                           |        | 3,843 |   | 1,033 |   |
| Deferred:                          |       |                                                |        |   |   |   |   |
| Federal                            | ** ** | **(16,312**                                         | **)**       | 18,892 |   | (15,000 | ) |
| State                              | ** ** | **(2,789**                                          | **)**       | 4,514 |   | (3,188 | ) |
| ** **                         | ** ** | **(19,101**                                         | **)**       | 23,406 |   | (18,188 | ) |
| Total income tax (expense) benefit | ** ** | **$**                                               | **(14,692** | **)** | $ | 27,249 |   | $ | (17,155 | ) |

 

Asof June 30, 2010, the Company has net operating loss carryforwards ofapproximately $2.6 million and $0.6 million related to its U.S. and Canadianoperations, respectively.  The netoperating loss carryforwards related to U.S. operations will expire in fiscalyear 2029.  The net operating losscarryforwards related to Canadian operations will expire during fiscal years2014 through 2030.

 

Asa result of the Restructuring, the U.S. net operating loss carryforward thatrelates to operations prior to the Restructuring is subject to limitations thatmay affect the Company’s ability to utilize them in future periods**.  **As of June 30,2010, the Company is evaluating the potential impact of such limitations.

 

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Theprovision for income taxes varied from income taxes computed at the statutoryU.S. federal income tax rate as a result of the following:

 
| ** **                                                               | ** ** | **Fiscal Years ended June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                               | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                     |       |                                                |       |   |   |   |   |
| Federal statutory rate                                                   | ** ** | **35.0**                                            | **%**      | 35.0 | % | 35.0 | % |
| State statutory rate, net of federal benefit                             | ** ** | **4.0**                                             |       | 3.9 |   | 4.5 |   |
| Total statutory rate                                                     | ** ** | **39.0**                                            |       | 38.9 |   | 39.5 |   |
| Impact of prior year adjustments on current and  deferred income taxes   | ** ** | **2.2**                                             |       | — |   | (0.6 | ) |
| Impact of changing tax rates on prior year  deferred balances            | ** ** | **(1.3**                                            | **)**      | — |   | 1.0 |   |
| Impact of reversal of deferred tax asset for stock  compensation expense | ** ** | **6.3**                                             |       | — |   | — |   |
| Impact of permanent differences                                          | ** ** | **(0.4**                                            | **)**      | (0.2 | ) | 1.0 |   |
| Impact of novated interest rate swaps                                    | ** ** | **(11.4**                                           | **)**      |   |   |   |   |
| Impact of recording valuation allowance                                  | ** ** | **20.8**                                            |       | (17.3 | ) | **—** | ** ** |
| Other                                                                    | ** ** | **0.9**                                             |       | — |   | — |   |
| Effective tax rate                                                       | ** ** | **56.1**                                            | **%**      | 21.4 | % | 40.9 | % |

 

Majortaxing jurisdictions for the Company and tax years for each that remain subjectto examination are as follows:

 
| **Taxing Jurisdiction** | ** ** | **Open Fiscal Years** | ** ** |
|------------------------------|------------|---------------------------------|------------|
|                         |       |                            |       |
| U.S. Federal                 |       | 2007 and later                  |       |
| U.S. states and cities       |       | 2002 and later                  |       |
| Canada                       |       | 2004 and later                  |       |

 

Thesignificant components of the Company’s deferred tax assets and liabilities aresummarized in the following table.

 
| ** **                                             | ** ** | **Balance at June 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                | ** ** |
| **Deferred tax assets:**                               |       |                                   |       |   |   |
| Depreciation and amortization                          | ** ** | **$**                                  | **18,751** |   | $ | 18,982 |   |
| Net unrealized losses from risk management  activities | ** ** | **3,197**                              |       | 18,693 |   |
| Allowance for doubtful accounts                        | ** ** | **1,992**                              |       | 2,860 |   |
| Tax loss carryforwards                                 | ** ** | **3,652**                              |       | 2,724 |   |
| Accrued bonuses                                        | ** ** | **1,540**                              |       | 1,707 |   |
| Stock compensation expense                             | ** ** | **901**                                |       | 1,642 |   |
| Novation of interest rate swaps                        | ** ** | **2,996**                              |       | — |   |
| Other reserves                                         | ** ** | **133**                                |       | 165 |   |
| Valuation allowance                                    | ** ** | **(28,123**                            | **)**      | (22,664 | ) |
| Total deferred tax assets                              | ** ** | **5,039**                              |       | 24,109 |   |
| **Deferred tax liabilities:**                          |       |                                   |       |   |   |
| State tax liability                                    | ** ** | **32**                                 |       | — |   |
| Total deferred tax liabilities                         | ** ** | **32**                                 |       | — |   |
| Net deferred tax asset                                 | ** ** | **$**                                  | **5,007**  |   | $ | 24,109 |   |
|                                                   |       |                                   |       |   |   |
| **Balance sheet classification:**                      |       |                                   |       |   |   |
| Current deferred tax asset                             | ** ** | **$**                                  | **1,378**  |   | $ | 9,020 |   |
| Long-term deferred tax asset                           | ** ** | **3,629**                              |       | 15,089 |   |
| Current deferred tax liability                         | ** ** | **—**                             |       | — |   |
| Net deferred tax asset                                 | ** ** | **$**                                  | **5,007**  |   | $ | 24,109 |   |

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amount of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. The Company’s policy is to establish a valuation allowance if it is “morelikely than not” that the related tax benefits will not be realized.  At June 30, 2010 and 2009, the Companydetermined that it was “more likely than not” that a portion of its deferredtax assets would not be realized.

 

Ananalysis of the valuation allowance is provided in the following table.

 

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| ** **                                | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                | ** ** | **2010**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(in thousands)**                            | ** ** |
|                                      |       |                                               |       |   |   |   |   |
| Balance at beginning of period            | ** ** | **$**                                              | **22,664** |   | $ | — |   | $ | — |   |
| Net increase (decrease) during the period | ** ** | **5,459**                                          |       | 22,664 |   | — |   |
| Balance at end of period                  | ** ** | **$**                                              | **28,123** |   | $ | 22,664 |   | $ | — |   |

 

TheCompany has deferred tax assets related to unrealized losses from riskmanagement activities.  The Companyanticipates that these deferred tax assets will be realized in future periodswhen sales of fixed price commodities, to which the unrealized losses from riskmanagement activities relate, occur. Therefore, the Company did not establish a valuation allowance for thesedeferred tax assets.

 

Forthe remaining deferred tax assets, the Company determined based on availableevidence, including historical financial results for the last three years, thatit is “more likely than not” that a portion of these items may not berecoverable in the future.  The Companyincreased its valuation allowance by $5.5. million related to its U.S.operations, due to a change in the mix of related deferred tax assets,resulting in a charge to tax expense recorded for fiscal year 2010.

 

AtJune 30, 2010, the Company had an uncertain tax position of $0.9 millionfor a timing issue related to compensation expense.  There was no change in the effective tax rateas a result of this item during the fiscal year ended June 30, 2010, andthe Company expects this item to be settled within the next twelve months.

 

TheCompany recognizes accrued interest and penalties related to income taxliabilities in accrued liabilities in the consolidated balance sheet andinterest expense in the consolidated statement of operations.  As of June 30, 2010, the Company accruedless than $0.1 million for potential interest and penalties for thecompensation-related timing issue described above.  There was no material change in this amountduring the fiscal year ended June 30, 2010.

 

TheWorker, Homeownership and Business Assistance Act of 2009 (the “WHBA Act”),which was signed into law on November 6, 2009, contains a number of taxlaw changes, including a provision that permits companies to elect to carryback certain net operating losses for up to five years.  As of June 30, 2010, the Company expectsto carry back approximately $15.7 million of current year tax losses to taxyears ending June 30, 2005 and 2006 under the provisions of the WHBA Act,which is expected to result in approximately $5.5 million of tax refunds.

 

***Note 13.******  ******Accounts Payable and Accrued Liabilities***

 

Accountspayable and accrued liabilities are summarized in the following table.

 
| ** **                                         | ** ** | **Balance at**     | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
| ** **                                         | ** ** | **(in thousands)** | ** ** |
| ** **                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| Trade accounts payable and accrued liabilities (1) | ** ** | **$**                   | **16,069** |   | $ | 13,952 |   |
| Accrued commodity purchases                        | ** ** | **2,083**               |       | 9,847 |   |
| Interest payable (2)                               | ** ** | **3,951**               |       | 8,946 |   |
| Payroll and related expenses                       | ** ** | **4,301**               |       | 4,761 |   |
| Sales and other taxes                              | ** ** | **—**              |       | 2,193 |   |
| Other                                              | ** ** | **3,898**               |       | 3,448 |   |
| Total accounts payable and accrued liabilities     | ** ** | **$**                   | **30,302** |   | $ | 43,147 |   |

 

----

(1)   Includes $0.2 and $1.9 million due to relatedparties at June 30, 2010 and 2009, respectively, for legal services,financial advisory services and management fees.  Refer to Note 20 for additional informationregarding related party transactions.

(2)   Includes $1.0 million of accrued interest at June 30,2009 related to Bridge Financing Loans and the Denham Credit Facility.  All amounts due to the Bridge Financing Loanslenders and Denham were repaid in September 2009 in connection with theRestructuring.  Refer to Note 20 foradditional information regarding related party transactions.

 

Tradeaccounts payable and accrued expenses include amounts accrued fortransportation and distribution charges, imbalances, other utility-relatedexpenses and general operating expenses. Interest payable primarily includes accrued and unpaid interestassociated with the Fixed Rate Notes due 2014 and the Floating Rate Notes due2011.

 

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***Note 14.******  ******Derivatives and Hedging Activities***

 

TheCompany is exposed to certain risks relating to its ongoing businessoperations.  The primary risks managed byusing derivative instruments are commodity price risk and interest raterisk.  The Company has a risk managementpolicy that is intended to reduce its financial exposure related to changes inthe price of natural gas and electricity and to changes in the interest ratesassociated with its Commodity Supply Facility and Floating Rate Notes due2011.  The Company’s risk managementpolicy defines various risk management controls and limits that are designed tomonitor its commodity price risk position and ensure that hedging performanceis in line with objectives established by its Board of Directors andmanagement.  Speculative tradingactivities are explicitly prohibited under the Company’s risk managementpolicy.

 

TheCompany utilizes derivative financial instruments to reduce its exposure tofluctuations in the price of natural gas and electricity.  Commodity derivatives utilized typicallyinclude swaps, forwards and options that are bilateral contracts withcounterparties.  In addition, certaincontracts with customers are also accounted for as derivatives.  The Company has not elected to designate anyderivative instruments as hedges under U.S. GAAP guidelines.  Accordingly, any changes in fair value duringthe term of a derivative contract are adjusted through unrealized losses(gains) from risk management activities in the consolidated statements ofoperations with offsetting adjustments to unrealized gains or unrealized lossesfrom risk management activities in the consolidated balance sheets.  Unrealized gains from risk managementactivities on the consolidated balance sheets represent receivables fromvarious derivative counterparties, net of amounts due to the samecounterparties when master netting agreements exist.  Unrealized losses from risk management activitiesrepresent liabilities to various derivative counterparties, net of receivablesfrom the same counterparties when master netting agreements exist.  Settlements on the derivative instruments arerealized monthly and are generally based upon the difference between thecontract price and the settlement price as quoted on NYMEX or other publishedindex.

 

Therecorded values of derivative instruments reflect management’s best estimate offair value, which takes into account various factors including closing exchangeand over-the-counter quotations, parity differentials and volatility factorsunderlying the commitments.  In addition,the recorded fair values are discounted to reflect counterparty credit risk andtime value of settlement.

 

Grossvolumes associated with commodity and interest rate derivative contracts thatare recorded at fair value on the consolidated balance sheets, which expire atvarious times through March 2013, are summarized in the followingtable.  The volumes in the table do notquantify risk or represent assets or liabilities of the Company, but are usedin the calculations of fair value and cash settlements under the contracts.

 
| ** **                                                         | ** **   | **Open Positions as of  June 30,** | ** **   |
|--------------------------------------------------------------------|--------------|--------------------------------------------------------|--------------|
| ** **                                                         | ** **   | **2010**                                               | ** **   | **2009** | ** ** |
| **Natural gas instruments**(amounts  reflected in MMBtus) (1)**:** | ** **   | ** **                                             | ** **   | ** ** | ** ** |
| Financial forward derivative contracts:                            | ** **   | ** **                                             | ** **   | ** ** | ** ** |
| NYMEX-referenced over the counter contracts                        | ** **   | **21,358,000**                                         |         | 32,298,000 |   |
| Basis contracts                                                    | ** **   | **18,794,000**                                         |         | 22,172,000 |   |
| Option contracts                                                   | ** **   | **550,000**                                            |         | 2,015,000 |   |
| Physical forward contracts (2):                                    | ** **   | ** **                                             |         |   |   |
| Physical fixed contracts                                           | ** **   | **4,218,000**                                          |         | — |   |
| Physical basis contracts                                           | ** **   | **276,000**                                            |         | — |   |
| Physical index contracts                                           | ** **   | **1,375,000**                                          |         | — |   |
| *** ***                                                       | *** *** | *** ***                                           | *** *** | *** *** | *** *** |
| **Electricity instruments**(amounts  reflected in MWhrs) (3)**:**  | ** **   | ** **                                             |         |   |   |
| Financial forward derivative contracts:                            | ** **   | ** **                                             |         |   |   |
| Swaps and fixed price contracts                                    | ** **   | **677,000**                                            |         | 168,000 |   |
| Physical forward contracts (2)                                     | ** **   | **139,000**                                            |         | — |   |
|                                                               |         |                                                   |         |   |   |
| **Interest rate swaps (in  millions)**                             | ** **   | **$**                                                  | **80.0**     |   | $ | 110.0 |   |
|                                                                    |              |                                                        |              |  |  |  |  |

 

----

(1)   Million British thermalunits, a standard unit of heating equivalent measure for natural gas. A unit ofheat equal to 1,000,000 Btus, or 1 MMBtu, is the thermal equivalent ofapproximately 1,000 cubic feet of natural gas.

(2)   Represents agreements forthe purchase and sale of natural gas or electricity that are accounted for asderivatives because they did not qualify for the “normal purchases and sales”exclusion under U.S. GAAP as of the respective period-end date.

(3)   Megawatt Hours, eachrepresenting 1 million watt hours or a thousand kilowatt hours, which is theamount of electric energy produced or consumed in a period of time.

 

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Thefair value of these derivative instruments recorded on the Company’sconsolidated balance sheets is summarized in the following table.

** **
| **Type of Derivative**          | ** ** | **Location on the Consolidated Balance Sheet** | ** ** | **Prior to  Netting** | ** ** | **Impact of   Master Netting  Agreements** | ** ** | **After Netting** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | ** **                                                              | ** ** | ** **                 | ** ** | **(in thousands)**                                   | ** ** | ** **             | ** ** |
| **Fair value as of June 30,  2010:** |       |                                                                    |       |                       |       |                                                      |       |                   |       |
| **Asset derivatives:**                    |       |                                                                    |       |                       |       |                                                      |       |                   |       |
| Commodity derivatives                     |       | Unrealized  gains from risk management activities, net                  | ** ** | **$**                      | **13,756** | ** **                                                | **$**      | **(13,756**            | **)**      | **$** | **—** | ** ** |
| Total                                     | ** ** | ** **                                                              | ** ** | **$**                      | **13,756** | ** **                                                | **$**      | **(13,756**            | **)**      | **$** | **—** |   |
|                                      |       |                                                                    |       |                       |       |                                                      |       |                   |       |
| **Liability Derivatives:**                |       |                                                                    |       |                       |       |                                                      |       |                   |       |
| Commodity derivatives                     |       | Unrealized  losses from risk management activities, net                 | ** ** | **$**                      | **26,315** | ** **                                                | **$**      | **(13,756**            | **)**      | **$** | **12,559** | ** ** |
| Interest rate derivatives                 |       | Unrealized  losses from risk management activities, net                 | ** ** | **6,029**                  | ** ** | **—**                                                | ** ** | **6,029**              | ** ** |
| Total                                     | ** ** | ** **                                                              | ** ** | **$**                      | **32,344** | ** **                                                | **$**      | **(13,756**            | **)**      | **$** | **18,588** |   |
| ** **                                |       |                                                                    |       |                       |       |                                                      |       |                   |       |
| **Fair value as of June 30,  2009:** |       |                                                                    |       |                       |       |                                                      |       |                   |       |
| **Asset derivatives:**                    |       |                                                                    |       |                       |       |                                                      |       |                   |       |
| Commodity derivatives                     |       | Unrealized  gains from risk management activities, net                  |       | $                          | 24,649     |                                                      | $          | (24,355                | )          | $ | 294 |   |
| Total                                     |       |                                                                    |       | $                          | 24,649     |                                                      | $          | (24,355                | )          | $ | 294 |   |
|                                      |       |                                                                    |       |                       |       |                                                      |       |                   |       |
| **Liability Derivatives:**                |       |                                                                    |       |                       |       |                                                      |       |                   |       |
| Commodity derivatives                     |       | Unrealized  losses from risk management activities, net                 |       | $                          | 64,347     |                                                      | $          | (24,355                | )          | $ | 39,992 |   |
| Interest rate derivatives                 |       | Unrealized  losses from risk management activities, net                 |       | 8,303                      |       | —                                                    |       | 8,303                  |       |
| Total                                     |       |                                                                    |       | $                          | 72,650     |                                                      | $          | (24,355                | )          | $ | 48,295 |   |

 

Theeffect of derivative instruments on the Company’s consolidated statements ofoperations is summarized in the following table.

 

 
| **Type of Derivative** | ** ** | **Location of (Gains) Losses Recognized on the**            | ** ** | **Amount of (Gains) Losses Recognized for   the Fiscal Year Ended June 30,** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Instrument**                   | ** ** | **Consolidated Statement of Operations**                                   | ** ** | **2010**                                                                                                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                       | ** ** | ** **                                                                                | ** ** | ** **                                                                                                                          | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Commodity                        |       | Cost of goods sold — realized (gains) losses from  risk management activities, net   | ** ** | **$**                                                                                                                               | **48,211** |   | $ | 72,824 |   | $ | 6,747 |   |
| Commodity                        |       | Cost of goods sold — unrealized (gains) losses  from risk management activities, net | ** ** | **(27,139**                                                                                                                         | )          | 87,575 |   | (67,168 | ) |
| Interest rate                    |       | Interest expense, net of interest income                                                  | ** ** | **(2,274**                                                                                                                          | **)**      | 3,693 |   | 3,290 |   |
| Total                            | ** ** | ** **                                                                                |       | **$**                                                                                                                               | **18,798** |   | $ | 164,092 |   | $ | (57,131 | ) |

 

**CommodityPrice Risk Management Activities**

 

TheCompany utilizes swap instruments and, to a lesser extent, option instrumentsto economically hedge the anticipated natural gas and electricity commoditypurchases required to meet expected customer demand for all accounts servedunder fixed price contracts (up to 110% in the winter months with respect tocustomer demand in certain natural gas utility service areas with dailybalancing requirements and up to 110% in the summer months with respect tocustomer demand in certain electricity utility service areas).

 

***Financial Natural Gas Derivative Contracts***

 

TheCompany utilizes the Commodity Supply Facility to enter into NYMEX-referencedover-the-counter swaps, basis swaps and options to economically hedge the riskof variability in the cost of natural gas. Under the Commodity Supply Facility, as of June 30, 2010, theCompany has the ability to enter into NYMEX and basis swaps through March 2013.

 

Inconnection with the Commodity Supply Facility, during the fiscal year ended June 30,2010, certain of the Company’s natural gas hedge agreements under the formerHedge Facility were novated to RBS Sempra from the previous counterparty.  Such novations did not have any impact on theCompany’s rights, obligations, risks or accounting methodology associated withthe agreements.

 

***Physical Forward Natural Gas Derivative Contracts***

 

Asof June 30, 2009, the Company had forward physical contracts to purchasenatural gas beginning in July 2009 and ending in November 2010.  Based on the terms of these purchases, theCompany had elected to treat all such contracts as “normal purchases” underU.S. GAAP, and therefore the contracts were not reported on the consolidatedbalance sheets at June 30, 

 

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2009.

 

Underthe terms of the Commodity Supply Facility, most of the outstanding physicalforward agreements for the purchase of natural gas were novated to RBS Sempraduring the fiscal year ended June 30, 2010.  Based upon the terms of the ISDA MasterAgreements, certain of these novated agreements no longer qualify as “normalpurchases.”  Since the novation dates ofthese agreements, changes in fair value have been reflected in earnings andrecorded in unrealized gains and/or unrealized losses from risk managementactivities on the consolidated balance sheets at June 30, 2010.  These agreements are included in the June 30,2010 fair value measurements reported in Note 15.

 

***Financial Electricity Derivative Contracts***

 

Asof June 30, 2009, the Company did not have an exclusive agreement with anysingle hedge provider for electricity. The Company managed its exposure to risk associated with its electricityhedge providers through a formal credit risk management process and throughdaily review of exposures from open positions. As of June 30, 2009, all of the Company’s electricity hedgepositions were with counterparties with investment grade credit ratings.  The Company generally was required to postletters of credit to cover its liability positions with various counterparties inaccordance with electricity hedging agreements.

 

EffectiveSeptember 22, 2009, under the Commodity Supply Facility, the Company hasan exclusive agreement with RBS Sempra for electricity economic hedgingactivities.  Subsequent to theRestructuring, the Company’s existing electricity swap agreements with othercounterparties were novated to RBS Sempra. Such novations did not have any impact on the Company’s rights,obligations, risks or accounting methodology associated with the agreements.

 

***Physical Forward Electricity Derivative Contracts***

 

Asof June 30, 2009, the Company had physical forward contracts to purchaseelectricity beginning in July 2009 and ending in September 2011.  Based on the terms of these purchases, theCompany had elected to treat all such contracts as “normal purchases” underU.S. GAAP, and therefore the contracts were not reported on the consolidatedbalance sheets at June 30, 2009.

 

Underthe terms of the Commodity Supply Facility, all physical forward agreements forthe purchase of electricity were novated to RBS Sempra during the secondquarter of fiscal year 2010.  Based uponthe terms of the ISDA Master Agreements, certain of these novated agreements nolonger qualify as “normal purchases.” Since the novation dates of these agreements, changes in fair value havebeen reflected in earnings and recorded in unrealized gains and/or unrealizedlosses from risk management activities on the consolidated balance sheets at June 30,2010.  These agreements are included inthe June 30, 2010 fair value measurements reported in Note 15.

 

**InterestRate Risk Management Activities**

 

TheCompany utilizes interest rate swaps to manage its exposure to interest ratefluctuations by utilizing interest rate swaps to effectively convert theinterest rate exposure from a variable rate to a fixed rate of interest.  Under the Commodity Supply Facility, theCompany is subject to variable interest rates in connection with cashborrowings and credit support, primarily in the form of letters of credit,provided by RBS Sempra.  The total amountof letters of credit outstanding under the Commodity Supply Facility willfluctuate throughout the Company’s fiscal year due to the seasonality of itsbusiness.  As of June 30, 2010,approximately $34.0 million of letters of credit were outstanding under theCommodity Supply Facility.  The Companyis also exposed to interest rate fluctuations in connection with the $6.4million aggregate principal amount of Floating Rate Notes due 2011 that wasoutstanding at June 30, 2010.

 

Asof June 30, 2010, an $80.0 million swap was outstanding, which expires on August 1,2011.  The fixed-for-floating swapeffectively fixes the six-month LIBOR rate at 5.72% per annum.  During the fiscal year ended June 30,2010, the $80.0 million interest rate swap agreement was novated to RBS Semprafrom the previous counterparty, as required by the terms of the CommoditySupply Facility.  Such novation did nothave any impact on the Company’s rights, obligations, risks or accountingmethodology associated with the interest rate swap agreement.

 

AtJune 30, 2010, the Company posted $6.0 million of cash as collateralagainst its mark-to-market exposure related to the outstanding interest rateswap agreement, which is recorded in other current assets on the consolidatedbalance sheets.

 

TheCompany has not designated interest rate swaps as hedges and, accordingly,changes in the market value of the interest rate swaps are charged directly tointerest expense.  Changes in the marketvalue of interest rate swaps resulted in increases (decreases) to interestexpense of $2.3 million, $(3.7) million and $(3.3) million for the fiscal yearsended June 30, 2010, 2009 and 2008.

 

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**Credit Risk Associated with Derivative Financial Instruments**

 

TheCompany is exposed to credit risk associated with its economic hedging programand derivative financial instruments. Credit risk relates to the potential loss resulting from thenonperformance of a contractual obligation by a derivative counterparty.  Historically, the Company has executed itsfixed price derivative positions to include a master netting agreement thatmitigates the outstanding credit exposure. Under the Commodity Supply Facility, the Company’s risk managementactivities are with a financial institution that has an investment grade creditrating.  The Company’s risk managementpolicy sets forth guidelines for monitoring, managing and mitigating creditrisk exposures, establishes credit limits and requires ongoing financialreviews of counterparties.

 

***Note 15.******  ******Fair Value of Financial Instruments***

 

TheCompany measures assets and liabilities associated with various financial forwardderivative instruments and physical forward purchase and sale agreements atfair value on a recurring basis, and categorizes these fair value measurementsin accordance with a fair value hierarchy that prioritizes the assumptions, or “inputs,”used in applying valuation techniques. The three levels of inputs within the fair value hierarchy are:

 

·      **Level 1 —** Observable inputs thatreflect unadjusted quoted prices for identical assets and liabilities in activemarkets as of the reporting date.

·      **Level 2 —** Inputs other than quotedprices included in Level 1 that represent observable market-based inputs, suchas quoted market prices for similar assets****or liabilitiesin active markets or quoted market prices for identical assets or liabilitiesin markets that are not considered to be active.   Level 2 also includes unobservable inputsthat are corroborated by market data.

·      **Level 3** — Inputs that are notobservable from objective sources and therefore cannot be corroborated bymarket data.

 

Thefair value of the Company’s assets and liabilities that are measured at fairvalue on a recurring basis is summarized by level within the fair valuehierarchy in the following tables.

 
| ** **                | ** ** | **Balance at June 30, 2010** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|
| ** **                | ** ** | **Level 1**                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| ** **                | ** ** | **(in thousands)**                          | ** ** |
| **Liabilities:**          |       |                                             |       |   |   |   |   |   |   |
| Commodity derivatives     |       | $                                                | —     |   | $ | 12,559 |   | $ | — |   | $ | 12,559 |   |
| Interest rate derivatives |       | —                                           |       | 6,029 |   | — |   | 6,029 |   |
| Total                     |       | $                                                | —     |   | $ | 18,588 |   | $ | — |   | $ | 18,588 |   |

 
| ** **                | ** ** | **Balance at June 30, 2009** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|
| ** **                | ** ** | **Level 1**                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| ** **                | ** ** | **(in thousands)**                          | ** ** |
| **Assets:**               |       |                                             |       |   |   |   |   |   |   |
| Commodity derivatives     |       | $                                                | —     |   | $ | 294 |   | $ | — |   | $ | 294 |   |
| Total                     |       | $                                                | —     |   | $ | 294 |   | $ | — |   | $ | 294 |   |
|                      |       |                                             |       |   |   |   |   |   |   |
| **Liabilities:**          |       |                                             |       |   |   |   |   |   |   |
| Commodity derivatives     |       | $                                                | —     |   | $ | 39,992 |   | $ | — |   | $ | 39,992 |   |
| Interest rate derivatives |       | —                                           |       | 8,303 |   | — |   | 8,303 |   |
| Total                     |       | $                                                | —     |   | $ | 48,295 |   | $ | — |   | $ | 48,295 |   |

 

TheCompany has elected not to record the Fixed Rate Notes due 2014 or the FloatingRate Notes due 2011 at fair value.  Theaggregate principal amount of long-term debt recorded on the consolidatedbalance sheets, before original issue discount, is $73.7 million at June 30,2010.  Utilizing observable market data,the aggregate fair value of the Fixed Rate Notes due 2014 and the Floating RateNotes due 2011 was approximately $66.0 million as of June 30, 2010.

 

***Note 16.******  ******Commodity Supply Facility and Revolving Credit Facility***

 

**CommoditySupply Facility**

 

Inconnection with the Restructuring consummated on September 22, 2009, theRevolving Credit Facility, Hedge Facility and various arrangements for thesupply of natural gas and electricity were replaced by the Commodity SupplyFacility.  Under the Commodity SupplyFacility, the primary obligors are Holdings’ two significant operatingsubsidiaries, MXenergy Inc.

 

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andMXenergy Electric Inc.  All obligationsunder the Commodity Supply Facility are guaranteed by Holdings and its otherdomestic subsidiaries and are secured by a first priority lien on substantiallyall existing and future assets of Holdings and its domestic subsidiaries otherthan the Fixed Rate Notes Escrow Account described in Note 17.  The maturity date of the Commodity SupplyFacility is August 31, 2012.  RBSSempra has the right to extend such maturity date by one year in its solediscretion, if RBS Sempra provides notice no later than April 30, 2011.

 

TheCommodity Supply Facility provides for the exclusive supply of physical (otherthan as needed for balancing) and financial natural gas and electricity, creditsupport (including letters of credit and guarantees) for certain collateralneeds, cash advances for natural gas inventory and seasonal financing asneeded, and associated hedging transactions in order to maintain the balancedtrading book required by the Company’s risk management policies.  The Commodity Supply Facility provides forcertain volumetric fees for all natural gas and electricity purchases.

 

TheCommodity Supply Facility is governed by the separate ISDA Master Agreementsfor natural gas and electricity.  Duringfiscal year 2010, the Company entered into amendments to the ISDA MasterAgreements for natural gas and electricity, respectively, with the Company andcertain of its subsidiaries, as guarantors, and RBS Sempra.  These amendments resulted in the followingmaterial changes to the ISDA Master Agreements:

 

·      The definition of Adjusted Consolidated Tangible NetWorth in the ISDA Master Agreements was amended to exclude non-cash chargesassociated with any deferred tax valuation allowances;

·      The date by which the Company was required torelease or arrange for the release of all of its pipeline transportation andstorage capacity on interstate and inter provincial pipelines directly to RBSSempra was extended to April 1, 2010 from December 31, 2009;

·      Certain fees related to natural gas supply andhedging activity specifically related to the SSO program were revised; and

·      Natural gas purchased by the Company from RBS Sempraunder the SSO Program was specifically excluded from certain volume limitationsand/or minimum purchase requirements under the ISDA Master Agreements.

 

Asof June 30, 2010, the Company was in compliance with all provisions of theISDA Master Agreements.

 

Inaccordance with the terms of the ISDA Master Agreements, the Company isrequired to maintain a minimum collateral coverage ratio (the “CollateralCoverage Ratio”) of 1.25:1.00 for the months of October through March (inclusive)and 1.40:1.00 for any other calendar month. The Collateral Coverage Ratio is calculated as the ratio of: (1) certainassets of the Company, primarily including cash, amounts due from RBS Semprarepresenting the Company’s operating cash, accounts receivable from customersand LDCs and natural gas inventories; to (2) certain liabilities of theCompany, primarily arising from exposure and/or amounts due to RBS Sempra (includingamounts due for the purchase of natural gas and electricity, accrued but unpaidfinancing fees and settlements arising from derivative contracts).

 

Asof June 30, 2010, the Company had a Collateral Coverage Ratio ofapproximately 3.41:1.00.  The calculationof the Collateral Coverage Ratio as of June 30, 2010 resulted in availableliquidity of approximately $62.3 million. At June 30, 2010, the Company had no outstanding cash advances andhad $34.0 million of letters of credit outstanding under the Commodity SupplyFacility.

 

Inconnection with the Commodity Supply Facility, the Company must maintain aconsolidated tangible net worth, as defined in the ISDA Master Agreements, ofat least $60.0 million.  As of June 30,2010, the Company’s consolidated tangible net worth exceeded $60.0 million.

 

Providedthat the Company is in compliance with the Collateral Coverage Ratiorequirement, as described above, the Commodity Supply Facility provides forcash advances of up to $45.0 million to finance seasonal working capitalrequirements.  These cash borrowings willaccrue interest at the greater of: (1) RBS Sempra’s cost of funds plus 5%;or (2) LIBOR plus 5%.  Outstandingcredit support (e.g., letters of credit and/or guarantees) provided by RBSSempra will accrue interest at LIBOR plus 3%, with a minimum rate of 4%, exceptthat, if the cash held in certain collateral accounts exceeds all outstandingsettlement payments under the Commodity Supply Facility by $27.0 million,interest will accrue at a reduced rate of 1% on the amount of outstandingcredit support in excess of $27.0 million.

 

Underthe supply terms of the Commodity Supply Facility, the Company has the abilityto: (1) seek commodity price quotes from third parties for certainphysically or financially settled transactions with respect to gas andelectricity; and (2) request that RBS Sempra enter into such transactionswith such third parties at such prices and to concurrently enter intoback-to-back off-setting transactions with the Company with respect to suchthird party transactions.  Suchtransactions with third parties are subject to RBS Sempra approval, and to arequirement that the volumes of those transactions do not exceed certain annuallimits specified in the agreements that govern the Commodity SupplyFacility.  In addition to the actualpurchase price paid by RBS Sempra and certain related costs and expenses, theCompany is charged a fee for such purchases.

 

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Underthe Commodity Supply Facility, the Company is obligated to purchase a minimumof 130,000,000 MMBtus of natural gas from RBS Sempra, for physical delivery inaccordance with the following schedule:  (1) 39,000,000MMBtus during the first contract year; (2) 44,000,000 MMBtus during thesecond contract year; and (3) 47,000,000 MMBtus during the third contractyear.  In addition, the Company isobligated to purchase a minimum of 1,850,000 MWhrs of electricity from RBSSempra, for physical delivery in accordance with the following schedule:  (1) 500,000 MWhrs during the firstcontract year; (2) 650,000 MWhrs during the second contract year; and (3) 700,000MWhrs during the third contract year.  The estimated total value of these purchaseswill depend upon the market price of natural gas at the time of purchase.  The Company will be obligated to pay avolumetric fee for any unused balance of the minimum volume purchaserequirement for any contract year, or if the agreement is terminated prior tothe end of the contract.  The excess ofactual commodity purchases from RBS Sempra over the minimum purchaserequirement for any contract year, if any, will be deducted from the minimumpurchase requirement for the subsequent contract year.  As of June 30, 2010, the commodity to bepurchased for delivery to the Company’s customers during the first and secondcontract years of the Commodity Supply Facility is expected to exceed theminimum purchase obligation for natural gas and electricity for those years.

 

TheCommodity Supply Facility provides that the Company will release natural gastransportation and delivery capacity to RBS Sempra and for RBS Sempra toperform certain transportation and storage nominations. The Commodity SupplyFacility also provides for RBS Sempra to act on the Company’s behalf to satisfythe requirements of regional electricity transmission operators for capacityrights and ancillary services.

 

Underthe hedging terms of the Commodity Supply Facility, the Company’s aggregate outstanding notional amount of fixed pricephysical and/or financial hedges is limited to $260.0 million.  Fixed price hedges are limited to a contractterm of 24 months.  In addition, thefixed price portfolio of hedges is limited to a weighted-average volume tenornot to exceed 14 months in duration.  Asof June 30, 2010, the Company was in compliance with each of theserequirements.

 

With regards to the Company’s fixed price customer mix,the Company may not enter into any fixed price contracts, excluding renewals ofexisting fixed price contracts, if:

 

·      During any twelve-monthperiod, more than 75% of all residential customer equivalents (“RCEs”) havebeen added under fixed price contracts;

·      During any twelve-monthperiod, more than 235,000 RCEs have been added under fixed price contracts; and

·      The Company’s fixed price RCEsexceeds 325,000 at any time.

 

Inconnection with the Commodity Supply Facility, during the fiscal year ended June 30,2010, certain of the Company’s natural gas hedge agreements under the formerHedge Facility and all of the Company’s existing electricity swap agreementswith other counterparties were novated to RBS Sempra.  Additionally, certain of the Company’sforward physical agreements for the purchase of natural gas and all of theCompany’s forward physical agreements for the purchase of electricity werenovated to RBS Sempra.  Such novationsdid not have any impact on the Company’s rights, obligations, risks oraccounting methodology associated with the agreements.

 

Duringfiscal years 2009 and 2010, the Company incurred approximately $10.7 million oflegal fees, consulting fees and other costs directly related to the CommoditySupply Facility, which were deferred on the consolidated balance sheet and arebeing amortized as an increase to interest expense over the remaining term ofthe Commodity Supply Facility.  Thesedeferred costs include the value of 4,002,290 shares of Class B CommonStock issued to RBS Sempra in connection with the Restructuring.  Amortization expense associated with thesedeferred costs was approximately $2.8 million for the fiscal year ended June 30,2010, respectively.

 

TheISDA Master Agreements contain customary covenants that restrict certainactivities including, among other things, the Company’s ability to:

 

·                  incur additional indebtedness;

·                  create or incur liens;

·                  guarantee obligations of other parties;

·                  engage in mergers, consolidations,liquidations and dissolutions;

·                  create subsidiaries;

·                  make acquisitions;

·                  engage in certain asset sales;

·                  enter into leases or sale-leasebacks;

·                  make equity distributions;

·                  make capital expenditures;

·                  make loans and investments;

·                  make certain dividend, debt and otherrestricted payments;

 

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·                  engage in a different line of business;

·                  amend, modify or terminate certain materialagreements in a manner that is adverse to the lenders; and

·                  engage in certain transactions with affiliates.

 

TheISDA Master Agreements also contain customary events of default, including:

 

·                  payment defaults;

·                  breaches of representations and warranties;

·                  covenant defaults;

·                  cross defaults to certain other indebtedness(including the Fixed Rate Notes due 2014) in excess of specified amounts;

·                  certain events of bankruptcy and insolvency;

·                  ERISA defaults;

·                  judgments in excess of specified amounts;

·                  failure of any guaranty or security documentsupporting the Commodity Supply Facility to be in full force and effect;

·                  the termination or cancellation of anymaterial contract which termination or cancellation could reasonably beexpected to have a material adverse effect on us; or

·                  the occurrence of a change of control.

 

***Net Accounts Receivable from or Payable to RBSSempra***

 

Theagreements that govern the Commodity Supply Facility include provisions thatallow for net settlement of amounts due from and due to RBS Sempra.  Accordingly, the Company reports amounts duefrom and due to RBS Sempra net on the consolidated balance sheets.  At June 30, 2010, the net $43.1 millionamount due from RBS Sempra is reported as accounts receivable, net — RBS Sempraon the consolidated balance sheets.

 

**RevolvingCredit Facility**

 

Asof June 30, 2009, and through September 21, 2009, MXenergy Inc.and MXenergy Electric Inc. were borrowers under the Revolving CreditFacility.  During the fiscal year ended June 30,2009 and through September 30, 2009, the Company incurred approximately$9.1 million of amendment fees, legal fees, consulting fees and other costsdirectly related to amendments to the Revolving Credit Facility and HedgeFacility, which were deferred on the consolidated balance sheet and amortizedas an increase in interest expense over the remaining terms of the facilities.  Amortization expense associated with thesedeferred costs was approximately $1.6 million and $7.5 million during thefiscal years ended June 30, 2010 and 2009, respectively.

 

***Note 17.******  ******Long-Term Debt***

 

Long-termdebt is summarized in the following table.

 
| ** **                                                                                                 | ** ** | **Balance at June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **                                                                                                 | ** ** | **(in thousands)**                | ** ** |
| ** **                                                                                                 | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Fixed Rate Notes due 2014 (net of unamortized  original issue discount of $14,949)                         | ** ** | **$**                                  | **52,344** |   | $ | — |   |
| Floating Rate Notes due 2011 (net of unamortized  original issue discount of $35 and $1,724, respectively) | ** ** | **6,378**                              |       | 163,476 |   |
| Total long-term debt                                                                                       | ** ** | **$**                                  | **58,722** |   | $ | 163,476 |   |

 

**FixedRate Notes due 2014**

 

Inconnection with the Restructuring, the Company issued $67.8 million aggregateprincipal amount of the Fixed Rate Notes due 2014.  Interest on the Fixed Rate Notes due 2014accrues at the rate of 13.25% per annum and is payable semi-annually in cash onFebruary 1 and August 1 of each year. The Fixed Rate Notes due 2014 will mature on August 1, 2014.  Interest expense associated with the FixedRate Notes due 2014 was approximately $6.9 million for the fiscal year ended June 30,2010.

 

TheFixed Rate Notes due 2014 were issued at a discount of approximately $17.8million, which was recorded as a reduction from the Fixed Rate Notes due 2014balance on the Company’s consolidated balance sheets, and which is beingamortized as

 

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anincrease to interest expense over the remaining life of the Fixed Rate Notesdue 2014.  Total interest expenseassociated with amortization of this discount was approximately $2.9 millionfor the fiscal year ended June 30, 2010.

 

TheCompany incurred approximately $5.3 million of legal fees, consulting fees andother costs directly related to issuance of the Fixed Rate Notes due 2014,which were recorded as deferred debt issue costs on the consolidated balancesheets and are being amortized as an increase to interest expense over theremaining term of the Fixed Rate Notes due 2014.  Total interest expense associated with amortizationof these deferred debt issue costs was approximately $0.9 million for thefiscal year ended June 30, 2010.

 

On December 30, 2009, the Company entered into a purchaseagreement (the “Stock and Notes Purchase Agreement”) pursuant to which a holderof the Company’s Class A Common Stock and Fixed Rate Notes due 2014 (the “Seller”)agreed to sell its holdings to the Company. Pursuant to the Stock and Notes Purchase Agreement, on January 4,2010, the Company acquired approximately $0.5 million aggregate principalamount of Fixed Rate Notes due 2014 from the Seller for approximately $0.3million.  The resulting gain onextinguishment of debt of $0.2 million was recorded as a reduction of interestexpense.  A pro rata portion of deferreddebt issue costs and original debt issue discount associated with the FixedRate Notes due 2014 acquired, which approximated an aggregate amount of $0.1million, was also recorded as additional interest expense during the fiscalyear ended June 30, 2010.

 

TheFixed Rate Notes due 2014 are seniorsubordinated secured obligations of the Company, subordinated in right ofpayment to obligations of the Company under the Commodity Supply Facility.  The Fixed Rate Notes due 2014 are senior inpriority to the Company’s unsecured senior obligations, including theFloating Rate Notes due 2011, to the extent of the aggregate value of theassets securing the Fixed Rate Notes due 2014 that is in excess of theaggregate amount of the outstanding CommoditySupply Facility obligations.

 

The Fixed Rate Notes due 2014 are jointly, severally, fully andunconditionally guaranteed by all domestic subsidiaries of Holdings.

 

TheFixed Rate Notes due 2014 are secured by a first priority security interest inthe Fixed Rate Notes Escrow Account, which is maintained as security for futureinterest payments to holders of the Fixed Rate Notes due 2014, and by a secondpriority security interest in substantially all other existing and futureassets of the Company.  The Fixed RateNotes Escrow Account was funded with approximately $9.0 million in September 2009,which approximates the interest payable by the Company on the Fixed Rate Notesdue 2014 for a twelve-month period.

 

Atany time on or prior to August 1, 2011, the Company may, at its option,use the net cash proceeds of equity offerings, if any, to redeem either: (1) 100%of the aggregate principal amount of outstanding Fixed Rate Notes due 2014; or (2) upto 35% of the aggregate principal amount of outstanding Fixed Rate Notes due2014, in each case at a redemption price of 113.250% of the principal amountthereof, plus accrued and unpaid interest thereon, if any, to the date ofredemption, provided that:

 

·                  if the Company redeems less than all of theFixed Rate Notes due 2014, at least 65% of the principal amount of the FixedRate Notes due 2014 issued under the indenture governing them remainsoutstanding immediately after any such redemption; and

·                  the Company makes such redemption not morethan 90 days after the consummation of any such equity offering.

 

AfterAugust 1, 2011, the Company may redeem the Fixed Rate Notes due 2014 atits option, in whole or in part, upon not less than 30 days’ or more than 60 days’notice, at the redemption prices specified in the indenture that governs theFixed Rate Notes due 2014.

 

Upona change of control of the Company, the Company would be required to make anoffer to purchase each holder’s Fixed Rate Notes due 2014 at a price of 101% ofthe then outstanding principal amount thereof, plus accrued and unpaidinterest.

 

Theindenture that governs the Fixed Rate Notes due 2014 contains restrictions onHoldings and its subsidiaries with regard to declaring or paying any dividendor distribution on Holdings capital stock. As of June 30, 2010, the Company was in compliance with allprovisions of the indenture governing the Fixed Rate Notes due 2014.

 

Holdingshas no significant independent operations. Each of Holdings’ domestic subsidiaries jointly and severally, fully andunconditionally guarantees the Fixed Rate Notes due 2014.  Refer to Note 24 for consolidating financialstatements of Holdings and its guarantor and non-guarantor subsidiaries.

 

**FloatingRate Notes due 2011**

 

OnAugust 4, 2006, Holdings issued $190.0 million aggregate principalamount of Floating Rate Notes due 2011, which 

 

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matureon August 1, 2011.  The notes wereissued at 97.5% of par value and bear interest at LIBOR plus 7.5% perannum.  Interest is reset and payablesemi-annually on February 1 and August 1 of each year.

 

Duringfiscal years 2007 and 2008, the Company purchased $24.8 million aggregateprincipal amount of outstanding Floating Rate Notes due 2011, plus accruedinterest, from noteholders for amounts less than face value.  On September 22, 2009, in connectionwith the Restructuring, the Company consummated an exchange offer of $158.8million aggregate principal amount of outstanding Floating Rate Notes due 2011for $26.7 million of cash, $67.8 million aggregate principal amount of FixedRate Notes due 2014 and 33,940,683 shares of newly authorized Class ACommon Stock.

 

Holdersof approximately $6.4 million aggregate principal amount of Floating Rate Notesdue 2011 did not tender their notes pursuant to the Restructuring.  These Floating Rate Notes due 2011 willremain outstanding until their maturity date in August 2011 unlessacquired or retired by the Company sooner. The indenture governing the Floating Rate Notes due 2011 was amended toeliminate substantially all of the restrictive covenants and certain events ofdefault from such indenture.

 

Theinterest rate on the Floating Rate Notes due 2011 was 7.88% and 9.13% at June 30,2010 and June 30, 2009, respectively. The weighted-average interest rate was 8.26%, 10.02% and 11.95% for thefiscal years ended June 30, 2010, 2009 and 2008, respectively.  Interest expense associated with the FloatingRate Notes due 2011 was $3.7 million, $16.8 million and $21.0 million for thefiscal years ended June 30, 2010, 2009 and 2008, respectively.

 

Interestexpense associated with amortization of original issue discount was $1.7million, $0.8 million and $1.1 million for the fiscal years ended June 30,2010, 2009 and 2008, respectively. Interest expense associated with amortization of deferred debt issuecosts was $1.9 million, $0.9 million and $1.3 million for the fiscal yearsended June 30, 2010, 2009 and 2008, respectively.

 

Wehave entered into interest rate swap agreements to economically hedge thefloating rate interest expense on the Floating Rate Notes due 2011.  Refer to Note 14 for additional informationregarding the Company’s use of interest rate swaps.

 

Holdingshas no significant independent operations. Each of Holdings’ domestic subsidiaries jointly and severally, fully andunconditionally guarantees the Floating Rate Notes due 2011.  Refer to Note 24 for consolidating financialstatements of Holdings and its guarantor and non-guarantor subsidiaries.

 

***Note 18.   Redeemable Convertible Preferred Stock***

 

Priorto the Restructuring, Holdings was authorized to issue 5,000,000 shares ofPreferred Stock.  On June 30, 2004,MXenergy Inc. entered into a purchase agreement (the “Preferred Stock PurchaseAgreement”) with affiliates of Charterhouse Group Inc. and Greenhill CapitalPartners LLC (collectively, the “Preferred Investors”) to issue 1,451,310shares of Preferred Stock at a purchase price of $21.36 per share.  During the fiscal year ended June 30,2005, as part of a corporate reorganization, MXenergy Inc. merged with asubsidiary of Holdings to become a wholly owned subsidiary of Holdings andstockholders of MXenergy Inc. became stockholders of Holdings.  Total related offering expenses ofapproximately $1.6 million were deducted from the carrying value of thePreferred Stock, which resulted in a net carrying value of approximately $29.4million at June 30, 2007.

 

TheCompany determined that the Preferred Stock was redeemable at the option of thePreferred Investors as a result of the redemption provisions included in thePreferred Stock Purchase Agreement. Additionally, the Company determined that it was probable that thePreferred Stock became redeemable at June 30, 2009, which was the earliestpossible date that the Preferred Investors could have caused the Company tomake the redemption election described under the redemption provisions of thePreferred Stock Purchase Agreement. Therefore, as of June 30, 2009, the Preferred Stock was recordedoutside of stockholders’ equity on the consolidated balance sheets at itsestimated redemption value.

 

OnSeptember 22, 2009, in connection with the Restructuring, all outstandingshares of Preferred Stock were exchanged for 11,862,551 shares of newlyauthorized Class C Common Stock, which represented 21.84% of the aggregatetotal shares of the Company’s common stock outstanding as of the consummationdate of the Restructuring.  The $25.9million excess of the redemption value over the aggregate fair value of commonstock issued to the preferred shareholders was reclassified to stockholders’equity on the consolidated balance sheets. In connection with the Restructuring, Holdings filed an amended andrestated Certificate of Incorporation that did not authorize any PreferredStock.

 

***Note 19.   Common Stock***

 

**Amendmentand Restatement of Corporate Documents and Issuance of Common Stock**

 

Inconnection with the Restructuring, on September 22, 2009, Holdings’Certificate of Incorporation and Bylaws were amended and restated, and certainholders of common stock entered into the Stockholders Agreement.  These documents 

 

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containcustomary provisions, including, but not limited to, provisions relating tocertain approval rights, preemptive rights, share transfer restrictions andrights of first refusal.

 

Theamended and restated Certificate of Incorporation authorized 200,000,000 sharesof $0.01 par value common stock.  Thenumber of authorized shares and significant rights, as provided in theStockholders Agreement, of each class of common stock include:

 

·                  50,000,000shares of Class A Common Stock. Holders of the Class A Common Stock are not subject to any transferrestrictions and are entitled to designate five directors to the Board ofDirectors, at least two of whom shall be independent and qualify as “financialexperts.”

 

·                  10,000,000shares of Class B Common Stock. Shares of Class B Common Stock will convert to shares of Class CCommon Stock if RBS Sempra sells any of its shares (subject to certainexceptions defined in the amended and restated Certificate of Incorporation) orif all of the Company’s obligations under the Commodity Supply Facility havebeen paid in full and all commitments pursuant to the Commodity Supply Facilityhave been terminated.  RBS Sempra isentitled to designate one director to the Board of Directors.

 

·                  40,000,000shares of Class C Common Stock. Holders of Class C Common Stock who are current or former employeesof the Company or any of its subsidiaries may not transfer their shares (exceptby will or in connection with customary estate planning) until the thirdanniversary of the closing date of the Restructuring and, in the case of sharesacquired pursuant to the management incentive plan to be implemented by theCompany (the “Management Incentive Plan”), as otherwise provided in theManagement Incentive Plan.  Transfers of shares of Class C CommonStock are subject to a right of first refusal in favor of the holders of sharesof Class A Common Stock and holders of shares of Class B CommonStock.  Holders of Class C CommonStock are entitled to nominate and elect two directors to the Board ofDirectors.

 

·                  100,000,000shares of Class D Common Stock, which will only be issued by Holdings ifcertain transactions specified in the amended and restated Certificate ofIncorporation occur.

 

EffectiveJuly 27, 2010, the amended and restated Certificate of Incorporation andBylaws were further amended and restated and, on July 26, 2010, anamendment to the Stockholders Agreement became effective.  Refer to Note 4 for additional informationregarding the restated Certificate of Incorporation and Bylaws.

 

Inconnection with the Restructuring, Holdings issued the following shares ofcommon stock:

 

·                  33,940,683 shares of Class A CommonStock to holders of the Fixed Rate Notes due 2014, which represented 62.5% ofthe aggregate shares of common stock outstanding after the consummation of theRestructuring.  The aggregate fair valueof Class A Common Stock issued was approximately $82.1 million ($0.3million par value, recorded as Class A Common Stock; and $81.8 millionrecorded as additional paid in capital on the consolidated balance sheets).

 

·                  4,002,290 shares of Class B Common Stockto RBS Sempra, as a condition to the entry into the agreements governing theCommodity Supply Facility, which represented 7.37% of the aggregate shares ofcommon stock outstanding after consummation of the Restructuring.  The aggregate $9.0 million fair value of Class BCommon Stock issued to RBS Sempra (par value of less than $0.1 million,recorded as Class B Common Stock; and $9.0 million recorded as additionalpaid in capital on the consolidated balance sheets) was recorded as deferreddebt issuance costs on the consolidated balance sheets.

 

·                  11,862,551 shares of Class C CommonStock to holders of Preferred Stock, which represented 21.84% of the aggregateshares of the common stock outstanding after consummation of theRestructuring.  Prior to theRestructuring, the Preferred Stock was recorded at its estimated redemptionvalue of $54.6 million on the consolidated balance sheets.  The aggregate fair value of Class CCommon Stock issued to holders of Preferred Stock was $28.7 million ($0.1million par value, recorded as Class C Common Stock; and $28.6 millionrecorded as additional paid in capital on the consolidated balancesheets).  The $25.9 million excess ofredemption value of the Preferred Stock over the fair value of Class CCommon Stock issued to the holders of Preferred Stock was recorded as areduction of accumulated deficit on the consolidated balance sheets.

 

·                  4,499,588 shares of Class C Common Stockto the remaining holders of Holdings’ common stock issued and outstanding priorto the consummation of the Restructuring, which represented 8.29% of theaggregate shares of common stock outstanding after the consummation of theRestructuring.  All 4,681,219 shares ofHoldings’ common stock issued and outstanding prior to the Restructuring wereretired.

 

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Inconnection with the Restructuring, the Company incurred approximately $0.3million of legal fees, consulting fees and other costs directly related to theissuance of shares of common stock outlined above, which were recorded as areduction of additional paid in capital.

 

**Class ATreasury Stock**

 

Pursuantto the Stock and Notes Purchase Agreement, on December 30, 2009, the Companyacquired 229,781 shares of its Class A Common Stock from the Seller forapproximately $0.1 million.  As of June 30,2010, the Company does not intend to retire the outstanding shares of Class ATreasury Stock.

 

**Post-Restructuring Stock-Based Compensation Activity**

 

Thepurpose of the Company’s stock-based compensation program is to attract andretain qualified employees, consultants and other service providers byproviding them with additional incentives and opportunities to participate inthe Company’s ownership, and to create interest in the success and increasedvalue of the Company.  Approvedstock-based compensation plans are administered by the Compensation Committeeof the Board of Directors.  TheCompensation Committee has the authority to: (1) interpret the plans andto create or amend its rules; (2) establish award guidelines under theplans; and (3) determine, or delegate the determination to management, thepersons to whom awards are to be granted, the time at which awards will begranted, the number of shares to be represented by each award, and theconsideration to be received, if any. Stock-based awards under the plans generally are granted with anexercise price equal to the fair value of Holdings’ common stock on the grantdate, vest ratably based on three years of continuous service and have ten-yearcontractual terms.

 

Inconnection with the Restructuring, the Company terminated its three existingstock-based compensation plans and offered cash settlements to holders ofoptions and warrants in exchange for their agreement to cancel and terminatesuch options and warrants.  As a result,all outstanding options and warrants as of June 30, 2009 were cancelledand terminated in connection with the Restructuring.  Cash settlement payments of approximately$0.2 million were recorded as general and administrative expense during thefiscal year ended June 30, 2010.

 

Inconnection with the Restructuring, as agreed to by the shareholders, in January 2010,Holdings’ Board of Directors authorized the creation of the 2010 SIP, pursuantto which the Company may issue Class C Common Stock not to exceed 10% ofHoldings’ outstanding common stock (on a fully diluted basis) after givingeffect to the Restructuring.  Also in January 2010,Holdings’ Board of Directors approved grants of RSUs to certain seniorofficers, directors and a former director, pursuant to which the Company mayissue 2,960,204 shares of Class C Common Stock, representing 5% ofHoldings’ outstanding common stock (on a fully-diluted basis), as follows:

 

·                  2,858,164 RSUs, with a grant date fair valueof approximately $6.3 million, were granted to certain senior officers of theCompany, subject to vesting according to the following schedule: (i) one-thirdwill vest in September 2010; (ii) one-third will vest in September 2011;and (iii) one-third will vest in September 2012.

·                  102,040 RSUs, with a grant date fair value ofapproximately $0.2 million, were granted to directors and a former director ofHoldings, subject to vesting according to the following schedule: (i) 25%vested in January 2010; (ii) 25% vested in April 2010; (iii) 25%vested in July 2010; and (iv) 25% will vest in October 2010.

 

Duringthe fiscal year ended June 30, 2010, the Company recorded approximately$2.4 million of non-cash compensation expense in connection with the RSUs, forwhich the Company recorded a related tax benefit of approximately $0.9million.  The Company issued 51,020shares of Class C Common Stock, which had a grant date fair value ofapproximately $0.1 million, to directors when a portion of their RSUs vestedwithout restrictions.  The Companyexpects to record approximately $2.8 million, $1.1 million and $0.2 million ofcompensation expense related to outstanding RSU awards during the fiscal yearsended June 30, 2011, 2012 and 2013, respectively.

 

**Pre-Restructuring Stock-Based Compensation Activity**

 

Asof June 30, 2009, the Company had three active stock-based compensationplans under which warrants and options (collectively referred to as “awards”)have been granted to employees, directors and other non-employees.  As of June 30, 2009, the Company hadoptions and warrants outstanding which were, or may have been, exercisable for1,008,770 shares of common stock.  Theweighted average exercise price of awards exercisable as of June 30, 2009was $26.69 per share.  The Companyrecorded approximately $0.1 million, $0.5 million and $1.7 million of non-cashcompensation expense in general and administrative expenses during the fiscalyears ended June 30, 2010, 2009 and 2008, respectively, related to theseoutstanding awards.  The tax benefitassociated with this expense was $0, less than $0.1 million and approximately$0.4 million for the fiscal years ended June 30, 2010, 2009 and 2008,respectively.

 

Thevast majority of these options and all of the warrants were “out of the money”as of the consummation date of the Restructuring (i.e., the agreed-upon pricefor which the option/warrant holder may purchase the Company’s common stock 

 

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exceededthe current fair value of the common stock). In connection with the Restructuring, the Company terminated its threeexisting stock-based compensation plans and paid approximately $0.2 millionof  cash settlements to holders ofoptions and warrants in exchange for their agreement to cancel and terminatesuch options and warrants.

 

Therewere no options or warrants exercised and the Company did not grant anystock-based compensation awards from any of these stock-based compensationplans during the fiscal year ended June 30, 2010.

 

**Dividend Policy and Restrictions**

 

Holdings’Board of Directors, at its discretion, has the authority to declare and pay dividendson the Company’s common stock provided there were funds available to doso.  The Company is restricted in itsability to pay dividends by various provisions of agreements that govern theCommodity Supply Facility, the Fixed Rate Notes due 2014 and the Floating RateNotes due 2011.  The Company has neverdeclared or paid any cash dividends on its common stock and, as of June 30,2010, does not intend to pay any cash dividends in the foreseeable future.  The Company intends to retain any futureearnings to finance the expansion of its business and for general corporatepurposes.

 

**Common Stock Issued to Senior Executives**

 

InMarch 2008, the Compensation Committee of the Company’s Board of Directorsapproved the issuance of a combined total of 19,000 fully vested shares ofHoldings’ common stock to the Company’s Chief Executive Officer and ExecutiveVice President.  Total compensationexpense related to issuance of these shares was approximately $1.7 million,which included the fair value of the common stock issued and additionalcompensation to offset the taxable nature of the shares to the employees.

 

***Note 20.   Related Party Transactions***

 

Amountspaid or accrued to related parties are summarized in the following table.

 
| ** **                                                                   | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2010**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                   | ** ** | **(in thousands)**                            | ** ** |
| **Amount paid or accrued for:**                                              | ** ** | ** **                                         |       |   |   |   |   |
| Legal services:                                                              | ** ** | ** **                                         |       |   |   |   |   |
| General and administrative expense                                           | ** ** | **$**                                              | **1,114**  |   | $ | 1,169 |   | $ | 593 |   |
| Deferred debt issuance costs and stock issuance  costs                       | ** ** | **1,676**                                          |       | 773 |   | — |   |
| Financial advisory services recorded in general  and administrative expenses | ** ** | **32**                                             |       | 300 |   | 322 |   |
| Management fees recorded in general and  administrative expenses             | ** ** | **104**                                            |       | 904 |   | — |   |
| Interest expense — Denham Credit Facility                               | ** ** | **246**                                            |       | 813 |   | 528 |   |
| Interest expense — Bridge Financing Loans                               | ** ** | **197**                                            |       | 2,673 |   | — |   |
|                                                                         | ** ** | **$**                                              | **3,369**  |   | $ | 6,632 |   | $ | 1,443 |   |

 

**LegalServices**

 

Aformer director and current stockholder of the Company is senior counsel toPaul, Hastings, Janofsky & Walker LLP (“Paul Hastings”), a law firmthat provides legal services to the Company. Paul Hastings provides the Company with general legal services, whichare recorded in general and administrative expenses, and has provided legalservices associated with the Restructuring and amendments to the RevolvingCredit Facility and Hedge Facility, which were deferred on the consolidatedbalance sheets, to be amortized over the estimated useful lives associated withthe related agreements.  Paul Hastings isexpected to continue to provide legal services to the Company in futureperiods.

 

**FinancialAdvisory Services**

 

Priorto the consummation of the Restructuring, the Company had a financial advisoryservices agreement with Greenhill & Co., LLC (“Greenhill”), anaffiliate of Greenhill Capital Partners, a significant stockholder of theCompany (the “Greenhill Agreement”). Under the Greenhill Agreement, Greenhill provided advisory services inconnection with liquidity options considered during the Restructuring, whichwere recorded in general and administrative expenses during the respectiveperiods.  The Greenhill Agreement wasterminated effective September 22, 2009.

 

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** **

**ManagementFees**

 

Priorto the consummation of the Restructuring, the Company had agreed to pay Denham,Daniel Bergstein, a former director of Holdings, and Charter Mx LLC, anothersignificant stockholder of the Company, aggregate annual fees of $0.9 million,for management consulting services provided to the Company.  Approximately $0.1 million, $0.9 million and$0 million of fees associated with these arrangements were recorded in generaland administrative expenses for the fiscal years ended June 30, 2010, 2009and 2008, respectively.  These managementconsulting services arrangements were terminated on September 22, 2009.

 

EffectiveSeptember 23, 2009, the Company agreed to pay Daniel Bergstein annual feesof $50,000 for management consulting services provided to the Company.  Less than $0.1 million of fees associatedwith this arrangement were recorded in general and administrative expenses forthe fiscal year ended June 30, 2010. In addition, the Company granted RSUs to Mr. Bergstein in January 2010,pursuant to which the Company will record $22,000 of compensation expenseratably from January 15, 2010 through October 1, 2010.

 

**InterestExpense — Denham Credit Facility**

 

Denhamis a significant stockholder of the Company. As of June 30, 2009, the Company had borrowed the entire $12.0million available line under the Denham Credit Facility, which bore interest at9% per annum.  In connection with theRestructuring, the entire outstandingbalance under the Denham Credit Facility was repaid, including accruedinterest, and the facility was terminated on September 22, 2009.

 

**InterestExpense — Bridge Financing Loans**

 

Pursuantto the Revolving Credit Agreement, in November 2008, Charter Mx LLC,Denham and four members of the Company’s senior management team agreed to provideBridge Financing Loans in an aggregate amount of $10.4 million by becominglenders in a new bridge loan tranche under the Amended Revolving CreditAgreement.  Bridge Financing Loan amountswere as follows: (1) $5.0 million each from Charter Mx LLC and Denham; and(2) $0.1 million each from the Company’s Chief Executive Officer, ChiefFinancial Officer, former Chief Operating Officer and former Executive VicePresident.  An upfront fee of 2% of therespective loan amount was paid to each lender of the Bridge Financing Loansupon closing.  Interest accrued to suchBridge Financing Loans was as follows: (1) 16% per annum from the closingdate through April 6, 2009; (2) 18% per annum from April 7, 2009through July 6, 2009; and (3) 20% per annum from July 7, 2009through October 6, 2009.

 

TheBridge Financing Loan from Charter Mx LLC was repaid, with accrued interest, inApril 2009.  The remaining BridgeFinancing Loans from all other lenders were repaid, with accrued interest, inconnection with the Restructuring.

 

***Note 21.   Employee Benefits***

 

TheCompany sponsors an employee savings plan under Section 401(k) of theInternal Revenue Code for all full-time employees and part-time employees (whowork at least 1,000 hours annually) with at least three months of continuousservice.  Eligible employeesmay make pre-tax contributions up to 20% of their annual compensation, notto exceed the annual limitation set forth in Section 402 (g) for anyplan year.  The Company makes a matchingcontribution of up to 10% of each participating employee’s compensation up tothe maximum allowable under the plan. Employees whose employment date is prior to July 1, 2007, areimmediately 100% vested in all contributions. Employer contributions for employees whose employment date is on orafter July 1, 2007 vest in increments of 25% per year.  The Company made contributions of $1.3million, $1.4 million and $1.3 million for the fiscal years ended June 30,2010, 2009 and 2008, respectively.

 

***Note 22.   Commitments and Contingencies***

 

**Operating Leases**

 

TheCompany leases office space under non-cancelable operating leases, whichcontain escalation clauses, have terms that expire between July 2010 andOctober 2017 and are subject to extension at the option of the Company.  The Company takes into account all escalationclauses when determining the amount of future minimum lease payments.  All future minimum lease payments arerecognized on a straight-line basis over the minimum lease term.  Total rental expense associated with leasedspaces, which includes minimum lease payments and maintenance costs, was $1.3million, $1.3 million and $1.6 million for the fiscal years ended June 30,2010, 2009 and 2008, respectively. Future annual minimum lease payments under operating leases aresummarized in the following table.

 

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| **Fiscal year** | ** ** | **Amount**              | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | **(in thousands)** | ** ** |
|                 |       |                    |       |
| 2011                 |       | $                       | 590        |   |
| 2012                 |       | 564                     |       |
| 2013                 |       | 352                     |       |
| 2014                 |       | 234                     |       |
| 2015                 |       | 238                     |       |
| Thereafter           |       | 605                     |       |
| Total                |       | $                       | 2,583      |   |

 

**Capacity Commitments**

 

Asof June 30, 2010, the Company had entered into agreements to transport andstore natural gas.  Since the demand fornatural gas in the winter is high, the Company agreed to pay for certaincapacity on the transportation systems utilized for up to a twelve-monthperiod.  These take-or-pay agreementsobligate the Company to pay for the capacity committed even if it does not usethat capacity.  For contracts outstandingas of June 30, 2010, the total committed capacity charges wereapproximately $7.1 million.  Theseagreements generally were due to expire during various months during the fiscalyear ending June 30, 2011, and would have been replaced with new contractsas necessary.

 

Theterms of the ISDA Master Agreements require that the Company release naturalgas transportation and delivery capacity to RBS Sempra and for RBS Sempra toperform certain transportation and storage nominations.  During fiscal year 2010, the Company releasedtransportation and storage capacity in several markets to RBS Sempra accordingto a mutually acceptable schedule and in a manner intended to ensure aneffective transition of these functions. Under the terms of the ISDA Master Agreements, the Company is obligatedto reimburse RBS Sempra for various direct costs associated with transportationand storage capacity that RBS Sempra is managing on the Company’s behalf.

 

**Physical Commodity Purchase Commitments**

 

TheCommodity Supply Facility provides for the exclusive supply of physical naturalgas and electricity, other than as needed for balancing purposes for theCompany’s required balanced book of commodity and related hedgingactivity.  Under the Commodity SupplyFacility, the Company is obligated to purchase a minimum of 130,000,000 MMBtusof natural gas from RBS Sempra, for physical delivery in accordance with thefollowing schedule:  (1) 39,000,000MMBtus during the first contract year; (2) 44,000,000 MMBtus during thesecond contract year; and (3) 47,000,000 MMBtus during the third contractyear.  In addition, the Company isobligated to purchase a minimum of 1,850,000 MWhrs of electricity from RBSSempra, for physical delivery in accordance with the following schedule: (1) 500,000MWhrs during the first contract year; (2) 650,000 MWhrs during the secondcontract year; and (3) 700,000 MWhrs during the third contract year.  The Company will be obligated to pay avolumetric fee for any unused balance of the minimum volume purchaserequirement for any contract year, or if the agreement is terminated prior tothe end of the contract.  The excess ofactual commodity purchases from RBS Sempra over the minimum purchaserequirement for any contract year, if any, will be deducted from the minimumpurchase requirement for the subsequent contract year.  As of June 30, 2010, commodity purchasesby the Company for delivery to its customers during the first and secondcontract years of the Commodity Supply Facility are expected to exceed theminimum purchase obligations for both natural gas and electricity.

 

**LegalProceedings and Environmental Matters**

 

Fromtime to time, the Company is a party to claims and legal proceedings that arisein the ordinary course of business, including investigations of productmarketing, pricing and billing practices and employment matters.  The Company does not believe that any suchproceedings to which it is a party as of June 30, 2010 will have amaterial adverse impact on its results of operations, financial position orcash flows.

 

TheCompany does not have physical custody or control of the natural gas providedto our customers, or any facilities used to produce or transport natural gas orelectricity.  In addition, title to thenatural gas sold to customers is passed at the same point at which the Companyaccepts title from its natural gas suppliers. Therefore, the Company does not believe that it has significant exposureto legal claims or other liabilities associated with environmental concerns.

 

***Note 23.  Business Segments***

 

TheCompany’s core business is the retail sale of natural gas and electricity toend-use customers in deregulated markets. Accordingly, the Company’s business is classified into two businesssegments: natural gas and electricity. Through these business segments, natural gas and electricity are sold atfixed and variable contracted prices based on the demand or usage of customers.

 

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TheCompany’s principal operations are located in the U.S.  Its foreign operations, which are located inCanada, comprised less than 1% of the Company’s consolidated total assets at June 30,2010 and 2009 and less than 1% of consolidated sales of natural gas andelectricity for the fiscal years ended June 30, 2010, 2009 and 2008.

 

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Financialinformation for the Company’s business segments is summarized in the followingtables.

 
| ** **                                                                                         | ** ** | **Natural Gas**    | ** **  | **Electricity** | ** ** | **Total**    | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|-----------------|------------|--------------|------------|
| ** **                                                                                         | ** ** | **(in thousands)** | ** **  |
| **Fiscal year ended June 30,  2010:**                                                         |       |                    |        |            |       |         |       |
| ** **                                                                                         | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Sales                                                                                              | ** ** | **$**                   | **457,909** | ** **      | **$**      | **103,297**  | ** ** | **$** | **561,206** | ** ** |
| Cost of goods sold (excluding unrealized gains  (losses) from risk management activities, net) (1) | ** ** | **(354,615**            | **)**       | **(80,530**     | **)**      | **(435,145** | **)**      |
| Gross profit (excluding unrealized gains (losses)  from risk management activities, net) (1)       | ** ** | **$**                   | **103,294** | ** **      | **$**      | **22,767**   | ** ** | **126,061** | ** ** |
| ** **                                                                                         | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Items to reconcile total segment gross profit to  income before income tax expense:                | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Unrealized gains (losses) from risk management  activities, net                                    | ** ** | ** **              | ** **  | ** **      | ** ** | **27,139**   | ** ** |
| Operating expenses                                                                                 | ** ** | ** **              | ** **  | ** **      | ** ** | **(92,021**  | **)**      |
| Interest expense, net of interest income                                                           | ** ** | ** **              | ** **  | ** **      | ** ** | **(34,982**  | **)**      |
| ** **                                                                                         | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Income before income tax expense                                                                   | ** ** | ** **              | ** **  | ** **      | ** ** | **$**        | **26,197** | ** ** |
| ** **                                                                                         | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Assets allocated to business segments at period  end:                                              | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Accounts receivable, net                                                                           | ** ** | **$**                   | **29,303**  | ** **      | **$**      | **19,622**   | ** ** | **$** | **48,925** | ** ** |
| Natural gas inventories                                                                            | ** ** | **15,861**              |        | —          | ** ** | **15,861**   | ** ** |
| Goodwill                                                                                           | ** ** | **3,810**               |        | —          | ** ** | **3,810**    | ** ** |
| Customer acquisition costs, net                                                                    | ** ** | **17,911**              | ** **  | **12,514**      | ** ** | **30,425**   | ** ** |
| Total assets allocated to business segments                                                        | ** ** | **$**                   | **66,885**  | ** **      | **$**      | **32,136**   | ** ** | **$** | **99,021** | ** ** |
| ** **                                                                                         | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Customer acquisition costs capitalized during the  period                                          | ** ** | **$**                   | **11,443**  | ** **      | **$**      | **10,889**   | ** ** | **$** | **22,332** | ** ** |
|                                                                                               |       |                    |        |            |       |         |       |
| **Fiscal year ended June 30,  2009:**                                                         |       |                    |        |            |       |         |       |
|                                                                                               |       |                    |        |            |       |         |       |
| Sales                                                                                              |       | $                       | 670,584     |            | $          | 119,196      |       | $ | 789,780 |   |
| Cost of goods sold (excluding unrealized gains  (losses) from risk management activities, net) (1) |       | (572,616                | )           | (96,955         | )          | (669, 571    | )          |
| Gross profit (excluding unrealized gains (losses)  from risk management activities, net) (1)       |       | $                       | 97,968      |            | $          | 22,241       |       | 120,209 |   |
|                                                                                               |       |                    |        |            |       |         |       |
| Items to reconcile total segment gross profit to  income before income tax expense:                |       |                    |        |            |       |         |       |
| Unrealized gains (losses) from risk management  activities, net                                    |       |                    |        |            |       | (87,575      | )          |
| Operating expenses                                                                                 |       |                    |        |            |       | (114,779     | )          |
| Interest expense, net of interest income                                                           |       |                    |        |            |       | (45,305      | )          |
|                                                                                               |       |                    |        |            |       |         |       |
| Loss before income tax benefit                                                                     |       |                    |        |            |       | $            | (127,450   | ) |
|                                                                                               |       |                    |        |            |       |         |       |
| Assets allocated to business segments at period  end:                                              |       |                    |        |            |       |         |       |
| Accounts receivable                                                                                |       | $                       | 36,006      |            | $          | 11,592       |       | $ | 47,598 |   |
| Natural gas inventories                                                                            |       | 29,415                  |        | —          |       | 29,415       |       |
| Goodwill                                                                                           |       | 3,810                   |        | —          |       | 3,810        |       |
| Customer acquisition costs, net                                                                    |       | 20,882                  |        | 7,068           |       | 27,950       |       |
| Total assets allocated to business segments                                                        |       | $                       | 90,113      |            | $          | 18,660       |       | $ | 108,773 |   |
|                                                                                               |       |                    |        |            |       |         |       |
| Customer acquisition costs capitalized during the  period                                          |       | $                       | 11,606      |            | $          | 3,737        |       | $ | 15,343 |   |
|                                                                                               |       |                    |        |            |       |         |       |
| **Fiscal year ended June 30,  2008:**                                                         |       |                    |        |            |       |         |       |
|                                                                                               |       |                    |        |            |       |         |       |
| Sales                                                                                              |       | $                       | 669,522     |            | $          | 82,761       |       | $ | 752,283 |   |
| Cost of goods sold (excluding unrealized gains  (losses) from risk management activities, net) (1) |       | (564,219                | )           | (72,534         | )          | (636,753     | )          |
| Gross profit (excluding unrealized gains (losses)  from risk management activities, net) (1)       |       | $                       | 105,303     |            | $          | 10,227       |       | 115,530 |   |
|                                                                                               |       |                    |        |            |       |         |       |
| Items to reconcile total segment gross profit to  loss before income tax benefit:                  |       |                    |        |            |       |         |       |
| Unrealized gains (losses) from risk management  activities, net                                    |       |                    |        |            |       | 67,168       |       |
| Operating expenses                                                                                 |       |                    |        |            |       | (106,645     | )          |
| Interest expense, net of interest income                                                           |       |                    |        |            |       | (34,105      | )          |
|                                                                                               |       |                    |        |            |       |         |       |
| Income before income tax expense                                                                   |       |                    |        |            |       | $            | 41,948     |   |
|                                                                                               |       |                    |        |            |       |         |       |
| Customer acquisition costs capitalized during the  period                                          |       | $                       | 14,072      |            | $          | 5,483        |       | $ | 19,555 |   |

 

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(1)          Includes realized losses from risk managementactivities, but excludes unrealized gains (losses) from risk managementactivities. As the underlying customer contracts are not marked to market, theunrealized gains (losses) from risk management activities do not offer anaccurate indication of the ultimate cash impact to the business, as theultimate cash impact to the business is not determinable until delivery ofnatural gas under the customer contracts and the associated gain (loss) on riskmanagement activity is realized.

 

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***Note 24.  Condensed Consolidating Financial Information***

 

Eachof the following wholly owned domestic subsidiaries of Holdings (the “GuarantorSubsidiaries”) jointly, severally and unconditionally guarantee the Fixed RateNotes due 2014 on a senior secured basis and the Floating Rate Notes due 2011on a senior unsecured basis:

 

·           MXenergyCapital Holdings Corp.

·           MXenergyCapital Corp.

·           OnlineChoice Inc.

·           MXenergy GasCapital Holdings Corp.

·           MXenergy GasCapital Corp.

·           MXenergy Inc.

·           MXenergyElectric Capital Holdings Corp.

·           MXenergyElectric Capital Corp.

·           MXenergy Electric Inc.

·           MXenergyServices Inc.

·           Infometer.com Inc.

 

Theonly wholly owned subsidiary of Holdings that is not a guarantor for the FixedRate Notes due 2014 and Floating Rate Notes due 2011 (the “Non-guarantorSubsidiary”) is MXenergy (Canada) Ltd.

 

Consolidatingbalance sheets, consolidating statements of operations and consolidatingstatements of cash flows for Holdings, the combined Guarantor Subsidiaries andthe Non-guarantor Subsidiary are provided in the following tables.  Elimination entries necessary to consolidatethe entities are also presented.

 

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** **

**MXENERGY HOLDINGS INC.**

**Consolidating Balance Sheet**

**June 30, 2010**

**(in thousands)**

 
| ** **                                                                 | ** ** | **MXenergy  Holdings Inc.** | ** ** | **Non-guarantor********Subsidiary** | ** ** | **Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                 | ** ** | ** **                       | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Assets**                                                                 | ** ** | ** **                       | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                                            | ** ** | ** **                       | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Cash and cash equivalents                                                  |       | $                                | 22         |                                | $          | 384                               |       | $                | 5,814      |             | $          | — |   | $ | 6,220 |   |
| Restricted cash                                                            |       | —                           |       | —                              |       | 1,574                             |       | —           |       | 1,574            |       |
| Intercompany accounts receivable                                           |       | 111,769                          |       | —                              |       | —                            |       | (111,769         | )          | —           |       |
| Accounts receivable, net                                                   |       | —                           |       | 44                                  |       | 48,881                            |       | —           |       | 48,925           |       |
| Accounts receivable, net – RBS Sempra                                 |       | —                           |       | —                              |       | 43,054                            |       | —           |       | 43,054           |       |
| Natural gas inventories                                                    |       | —                           |       | —                              |       | 15,861                            |       | —           |       | 15,861           |       |
| Income taxes receivable                                                    |       | —                           |       | —                              |       | 6,063                             |       | —           |       | 6,063            |       |
| Deferred income taxes                                                      |       | —                           |       | —                              |       | 1,378                             |       | —           |       | 1,378            |       |
| Fixed Rate Notes Escrow Account                                            |       | 8,977                            |       | —                              |       | —                            |       | —           |       | 8,977            |       |
| Other current assets                                                       |       | 29                               |       | 11                                  |       | 16,232                            |       | —           |       | 16,272           |       |
| Total current assets                                                       |       | 120,797                          |       | 439                                 |       | 138,857                           |       | (111,769         | )          | 148,324          |       |
| Goodwill                                                                   |       | —                           |       | —                              |       | 3,810                             |       | —           |       | 3,810            |       |
| Customer acquisition costs, net                                            |       | —                           |       | —                              |       | 30,425                            |       | —           |       | 30,425           |       |
| Fixed assets, net                                                          |       | —                           |       | 1                                   |       | 2,738                             |       | —           |       | 2,739            |       |
| Deferred income taxes                                                      |       | —                           |       | —                              |       | 3,629                             |       | —           |       | 3,629            |       |
| Deferred debt issue costs                                                  |       | —                           |       | —                              |       | 12,552                            |       | —           |       | 12,552           |       |
| Intercompany notes receivable                                              |       | 73,706                           |       | —                              |       | —                            |       | (73,706          | )          | —           |       |
| Investment in subsidiaries                                                 |       | (48,826                          | )          | —                              |       | —                            |       | 48,826           |       | —           |       |
| Other assets                                                               |       | —                           |       | 50                                  |       | 491                               |       | —           |       | 541              |       |
| Total assets                                                               |       | $                                | 145,677    |                                | $          | 490                               |       | $                | 192,502    |             | $          | (136,649 | ) | $ | 202,020 |   |
|                                                                       |       |                             |       |                                |       |                              |       |             |       |             |       |
| **Liabilities and stockholders’  equity**                             |       |                             |       |                                |       |                              |       |             |       |             |       |
| Current liabilities:                                                       |       |                             |       |                                |       |                              |       |             |       |             |       |
| Accounts payable and accrued liabilities                                   |       | $                                | 4          |                                | $          | 125                               |       | $                | 30,173     |             | $          | — |   | $ | 30,302 |   |
| Intercompany accounts payable                                              |       | —                           |       | 1,799                               |       | 109,970                           |       | (111,769         | )          | —           |       |
| Current portion of unrealized losses from risk  management activities, net |       | —                           |       | —                              |       | 16,731                            |       | —           |       | 16,731           |       |
| Deferred revenue                                                           |       | —                           |       | —                              |       | 7,457                             |       | —           |       | 7,457            |       |
| Total current liabilities                                                  |       | 4                                |       | 1,924                               |       | 164,331                           |       | (111,769         | )          | 54,490           |       |
| Unrealized losses from risk management activities,  net                    |       | —                           |       | —                              |       | 1,857                             |       | —           |       | 1,857            |       |
| Long-term debt                                                             |       | 58,722                           |       | —                              |       | —                            |       | —           |       | 58,722           |       |
| Intercompany notes payable                                                 |       | —                           |       | —                              |       | 73,706                            |       | (73,706          | )          | —           |       |
| Total liabilities                                                          |       | 58,726                           |       | 1,924                               |       | 239,894                           |       | (185,475         | )          | 115,069          |       |
|                                                                       |       |                             |       |                                |       |                              |       |             |       |             |       |
| Commitments and contingencies                                              |       | —                           |       | —                              |       | —                            |       | —           |       | —           |       |
|                                                                       |       |                             |       |                                |       |                              |       |             |       |             |       |
| Stockholders’ equity (deficit):                                       |       |                             |       |                                |       |                              |       |             |       |             |       |
| Class A Common Stock                                                  |       | 339                              |       | —                              |       | —                            |       | —           |       | 339              |       |
| Class B Common Stock                                                  |       | 40                               |       | —                              |       | —                            |       | —           |       | 40               |       |
| Class C Common Stock                                                  |       | 164                              |       | —                              |       | —                            |       | —           |       | 164              |       |
| Common stock                                                               |       | —                           |       | 1                                   |       | —                            |       | (1               | )          | —           |       |
| Additional paid-in-capital                                                 |       | 139,702                          |       | —                              |       | —                            |       | —           |       | 139,702          |       |
| Class A Treasury stock                                                |       | (99                              | )          | —                              |       | —                            |       | —           |       | (99              | )          |
| Accumulated other comprehensive loss                                       |       | (156                             | )          | (156                                | )          | —                            |       | 156              |       | (156             | )          |
| Accumulative deficit                                                       |       | (53,039                          | )          | (1,279                              | )          | (47,392                           | )          | 48,671           |       | (53,039          | )          |
| Total stockholders’ equity                                            |       | 86,951                           |       | (1,434                              | )          | (47,392                           | )          | 48,826           |       | 86,951           |       |
| Total liabilities and stockholders’ equity                            |       | $                                | 145,677    |                                | $          | 490                               |       | $                | 192,502    |             | $          | (136,649 | ) | $ | 202,020 |   |

 

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**MXENERGY HOLDINGS INC.**

**Consolidating Balance Sheet**

**June 30, 2009**

**(in thousands)**

 
| ** **                                                                 | ** ** | **MXenergy********Holdings Inc.** | ** ** | **Non-guarantor********Subsidiary** | ** ** | **Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                 | ** ** | ** **                             | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Assets:**                                                                | ** ** | ** **                             | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                                            | ** ** | ** **                             | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Cash and cash equivalents                                                  |       | $                                      | —     |                                | $          | 262                               |       | $                | 23,004     |             | $          | — |   | $ | 23,266 |   |
| Restricted cash                                                            |       | —                                 |       | —                              |       | 75,368                            |       | —           |       | 75,368           |       |
| Intercompany accounts receivable                                           |       | 20,939                                 |       | —                              |       | —                            |       | (20,939          | )          | —           |       |
| Accounts receivable, net                                                   |       | —                                 |       | 56                                  |       | 47,542                            |       | —           |       | 47,598           |       |
| Natural gas inventories                                                    |       | —                                 |       | —                              |       | 29,415                            |       | —           |       | 29,415           |       |
| Current portion of unrealized gains from risk  management activities, net  |       | —                                 |       | —                              |       | 294                               |       | —           |       | 294              |       |
| Income taxes receivable                                                    |       | —                                 |       | —                              |       | 6,461                             |       | —           |       | 6,461            |       |
| Deferred income taxes                                                      |       | —                                 |       | —                              |       | 9,020                             |       | —           |       | 9,020            |       |
| Other current assets                                                       |       | —                                 |       | 87                                  |       | 11,997                            |       | —           |       | 12,084           |       |
| Total current assets                                                       |       | 20,939                                 |       | 405                                 |       | 203,101                           |       | (20,939          | )          | 203,506          |       |
|                                                                       |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Goodwill                                                                   |       | —                                 |       | —                              |       | 3,810                             |       | —           |       | 3,810            |       |
| Customer acquisition costs, net                                            |       | —                                 |       | 28                                  |       | 27,922                            |       | —           |       | 27,950           |       |
| Fixed assets, net                                                          |       | —                                 |       | 1                                   |       | 3,727                             |       | —           |       | 3,728            |       |
| Deferred income taxes                                                      |       | —                                 |       | —                              |       | 15,089                            |       | —           |       | 15,089           |       |
| Deferred debt issue costs                                                  |       | —                                 |       | —                              |       | 4,475                             |       | —           |       | 4,475            |       |
| Intercompany notes receivable                                              |       | 165,200                                |       | —                              |       | —                            |       | (165,200         | )          | —           |       |
| Investment in subsidiaries                                                 |       | (40,169                                | )          | —                              |       | —                            |       | 40,169           |       | —           |       |
| Other assets                                                               |       | —                                 |       | —                              |       | 513                               |       | —           |       | 513              |       |
| Total assets                                                               |       | $                                      | 145,970    |                                | $          | 434                               |       | $                | 258,637    |             | $          | (145,970 | ) | $ | 259,071 |   |
|                                                                       |       |                                   |       |                                |       |                              |       |             |       |             |       |
| **Liabilities and stockholders’  equity:**                            |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Current liabilities:                                                       |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Accounts payable and accrued liabilities                                   |       | $                                      | 12         |                                | $          | 160                               |       | $                | 42,975     |             | $          | — |   | $ | 43,147 |   |
| Intercompany accounts payable                                              |       | —                                 |       | 1,845                               |       | 19,094                            |       | (20,939          | )          | —           |       |
| Current portion of unrealized losses from risk  management activities, net |       | —                                 |       | —                              |       | 34,224                            |       | —           |       | 34,224           |       |
| Deferred revenue                                                           |       | —                                 |       | —                              |       | 4,271                             |       | —           |       | 4,271            |       |
| Bridge Financing loans payable                                             |       | —                                 |       | —                              |       | 5,400                             |       | —           |       | 5,400            |       |
| Denham Credit Facility                                                     |       | —                                 |       | —                              |       | 12,000                            |       | —           |       | 12,000           |       |
| Total current liabilities                                                  |       | 12                                     |       | 2,005                               |       | 117,964                           |       | (20,939          | )          | 99,042           |       |
| Unrealized losses from risk management activities,  net                    |       | —                                 |       | —                              |       | 14,071                            |       | —           |       | 14,071           |       |
| Long-term debt                                                             |       | 163,476                                |       | —                              |       | —                            |       | —           |       | 163,476          |       |
| Intercompany notes payable                                                 |       | —                                 |       | —                              |       | 165,200                           |       | (165,200         | )          | —           |       |
| Total liabilities                                                          |       | 163,488                                |       | 2,005                               |       | 297,235                           |       | (186,139         | )          | 276,589          |       |
|                                                                       |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Commitments and contingencies                                              |       | —                                 |       | —                              |       | —                            |       | —           |       | —           |       |
|                                                                       |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Redeemable convertible preferred stock                                     |       | 54,632                                 |       | —                              |       | —                            |       | —           |       | 54,632           |       |
|                                                                       |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Stockholders’ equity:                                                 |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Common stock                                                               |       | 47                                     |       | 1                                   |       | —                            |       | (1               | )          | 47               |       |
| Additional paid-in-capital                                                 |       | 18,275                                 |       | —                              |       | —                            |       | —           |       | 18,275           |       |
| Contributed capital                                                        |       | —                                 |       | (1                                  | )          | 24,386                            |       | (24,385          | )          | —           |       |
| Accumulated other comprehensive loss                                       |       | (3                                     | )          | (3                                  | )          | —                            |       | 3                |       | (3               | )          |
| Accumulated deficit                                                        |       | (90,469                                | )          | (1,568                              | )          | (62,984                           | )          | 64,552           |       | (90,469          | )          |
| Total stockholders’ equity                                            |       | (72,150                                | )          | (1,571                              | )          | (38,598                           | )          | 40,169           |       | (72,150          | )          |
| Total liabilities and stockholders’ equity                            |       | $                                      | 145,970    |                                | $          | 434                               |       | $                | 258,637    |             | $          | (145,970 | ) | $ | 259,071 |   |

 

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**MXENERGY HOLDINGS INC.**

**Consolidating Statement of Operations**

**Fiscal Year Ended June 30, 2010**

**(in thousands)**

 
| ** **                                                     | ** ** | **MXenergy********Holdings Inc.** | ** ** | **Non-guarantor********Subsidiary** | ** ** | **Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                     | ** ** | ** **                             | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Sales of natural gas and electricity                           |       | $                                      | —     |                                | $          | 553                               |       | $                | 560,653    |             | $          | — |   | $ | 561,206 |   |
| Cost of goods sold (excluding depreciation and  amortization): | ** ** | ** **                             | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** **       |       | ** **       |       |
| Cost of natural gas and electricity sold                       |       | —                                 |       | 345                                 |       | 386,589                           |       | —           |       | 386,934          |       |
| Realized losses from risk management activities                |       | —                                 |       | —                              |       | 48,211                            |       | —           |       | 48,211           |       |
| Unrealized losses from risk management activities              |       | —                                 |       | —                              |       | (27,139                           | )          | —           |       | (27,139          | )          |
|                                                           |       | —                                 |       | 345                                 |       | 407,661                           |       | —           |       | 408,006          |       |
| Gross profit                                                   |       | —                                 |       | 208                                 |       | 152,992                           |       | —           |       | 153,200          |       |
|                                                           |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Operating expenses:                                            |       |                                   |       |                                |       |                              |       |             |       |             |       |
| General and administrative expenses                            |       | 2,364                                  |       | (113                                | )          | 56,352                            |       | —           |       | 58,603           |       |
| Advertising and marketing expenses                             |       | —                                 |       | —                              |       | 3,749                             |       | —           |       | 3,749            |       |
| Reserves and discounts                                         |       | —                                 |       | —                              |       | 7,495                             |       | —           |       | 7,495            |       |
| Depreciation and amortization                                  |       | —                                 |       | 31                                  |       | 22,143                            |       | —           |       | 22,174           |       |
| Equity in operations of consolidated subsidiaries              |       | (13,869                                | )          | —                              |       | —                            |       | 13,869           |       | —           |       |
| Total operating expenses                                       |       | (11,505                                | )          | (82                                 | )          | 89,739                            |       | 13,869           |       | 92,021           |       |
|                                                           |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Operating profit                                               |       | 11,505                                 |       | 290                                 |       | 63,253                            |       | (13,869          | )          | 61,179           |       |
| Interest expense, net                                          |       | —                                 |       | —                              |       | 34,982                            |       | —           |       | 34,982           |       |
| Income before income tax expense                               |       | 11,505                                 |       | 290                                 |       | 28,271                            |       | (13,869          | )          | 26,197           |       |
| Income tax expense                                             |       | —                                 |       | —                              |       | (14,692                           | )          | —           |       | (14,692          | )          |
| Net income                                                     |       | $                                      | 11,505     |                                | $          | 290                               |       | $                | 13,579     |             | $          | (13,869 | ) | $ | 11,505 |   |

 

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**MXENERGY HOLDINGS INC.**

**Consolidating Statement of Operations**

**Fiscal Year Ended June 30, 2009**

**(in thousands)**

 
| ** **                                                     | ** ** | **MXenergy********Holdings Inc.** | ** ** | **Non-guarantor  Subsidiary** | ** ** | **Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                     | ** ** | ** **                             | ** ** | ** **                    | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Sales of natural gas and electricity                           |       | $                                      | —     |                          | $          | 358                               |       | $                | 789,422    |             | $          | — |   | $ | 789,780 |   |
| Cost of goods sold (excluding depreciation and  amortization): | ** ** | ** **                             | ** ** | ** **                    | ** ** | ** **                        | ** ** | ** **       |       | ** **       |       |
| Cost of natural gas and electricity sold                       |       | —                                 |       | 348                           |       | 596,399                           |       | —           |       | 596,747          |       |
| Realized losses from risk management activities                |       | —                                 |       | —                        |       | 72,824                            |       | —           |       | 72,824           |       |
| Unrealized losses from risk management activities              |       | —                                 |       | —                        |       | 87,575                            |       |             |       | 87,575           |       |
|                                                           |       | —                                 |       | 348                           |       | 756,798                           |       | —           |       | 757,146          |       |
| Gross profit                                                   |       | —                                 |       | 10                            |       | 32,624                            |       | —           |       | 32,634           |       |
| Operating expenses:                                            |       |                                   |       |                          |       |                              |       |             |       |             |       |
| General and administrative expenses                            |       | 519                                    |       | 733                           |       | 58,705                            |       | —           |       | 59,957           |       |
| Advertising and marketing expenses                             |       | —                                 |       | (454                          | )          | 2,571                             |       | —           |       | 2,117            |       |
| Reserves and discounts                                         |       | —                                 |       | —                        |       | 15,130                            |       | —           |       | 15,130           |       |
| Depreciation and amortization                                  |       | —                                 |       | 31                            |       | 37,544                            |       | —           |       | 37,575           |       |
| Equity in operations of consolidated subsidiaries              |       | 99,682                                 |       | —                        |       | —                            |       | (99,682          | )          | —           |       |
| Total operating expenses                                       |       | 100,201                                |       | 310                           |       | 113,950                           |       | (99,682          | )          | 114,779          |       |
|                                                           |       |                                   |       |                          |       |                              |       |             |       |             |       |
| Operating (loss) profit                                        |       | (100,201                               | )          | (300                          | )          | (81,326                           | )          | 99,682           |       | (82,145          | )          |
| Interest expense, net                                          |       | —                                 |       | —                        |       | 45,305                            |       | —           |       | 45,305           |       |
| (Loss) income before income tax benefit (expense)              |       | (100,201                               | )          | (300                          | )          | (126,631                          | )          | 99,682           |       | (127,450         | )          |
| Income tax benefit (expense)                                   |       | —                                 |       | —                        |       | 27,249                            |       | —           |       | 27,249           |       |
| Net (loss) income                                              |       | $                                      | (100,201   | )                             | $          | (300                              | )          | $                | (99,382    | )                | $          | 99,682 |   | $ | (100,201 | ) |

 

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**MXENERGY HOLDINGS INC.**

**Consolidating Statement of Operations**

**Fiscal Year Ended June 30, 2008**

**(dollars in thousands)**

 
| ** **                                                     | ** ** | **MXenergy********Holdings Inc.** | ** ** | **Non-guarantor********Subsidiary** | ** ** | **Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                     | ** ** | ** **                             | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Sales of natural gas and electricity                           |       | $                                      | —     |                                | $          | 1,481                             |       | $                | 750,802    |             | $          | — |   | $ | 752,283 |   |
| Cost of goods sold (excluding depreciation and  amortization): | ** ** | ** **                             |       |                                |       |                              |       |             |       | ** **       |       |
| Cost of natural gas and electricity sold                       |       | —                                 |       | 1,402                               |       | 628,604                           |       | —           |       | 630,006          |       |
| Realized losses from risk management activities                |       | —                                 |       | —                              |       | 6,747                             |       | —           |       | 6,747            |       |
| Unrealized losses from risk management activities              |       | —                                 |       | —                              |       | (67,168                           | )          |             |       | (67,168          | )          |
|                                                           |       | —                                 |       | 1,402                               |       | 568,183                           |       | —           |       | 569,585          |       |
| Gross profit                                                   |       | —                                 |       | 79                                  |       | 182,619                           |       | —           |       | 182,698          |       |
| Operating expenses:                                            |       |                                   |       |                                |       |                              |       |             |       |             |       |
| General and administrative expenses                            |       | 1,704                                  |       | 505                                 |       | 60,062                            |       | —           |       | 62,271           |       |
| Advertising and marketing expenses                             |       | —                                 |       | (426                                | )          | 4,972                             |       | —           |       | 4,546            |       |
| Reserves and discounts                                         |       | —                                 |       | —                              |       | 7,130                             |       | —           |       | 7,130            |       |
| Depreciation and amortization                                  |       | —                                 |       | 36                                  |       | 32,662                            |       | —           |       | 32,698           |       |
| Equity in operations of consolidated subsidiaries              |       | (26,497                                | )          | —                              |       | —                            |       | 26,497           |       | —           |       |
| Total operating expenses                                       |       | (24,793                                | )          | 115                                 |       | 104,826                           |       | 26,497           |       | 106,645          |       |
|                                                           |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Operating (loss) profit                                        |       | 24,793                                 |       | (36                                 | )          | 77,793                            |       | (26,497          | )          | 76,053           |       |
| Interest expense, net                                          |       | —                                 |       | —                              |       | 34,105                            |       | —           |       | 34,105           |       |
| (Loss) income before income tax benefit (expense)              |       | 24,793                                 |       | (36                                 | )          | 43,688                            |       | (26,497          | )          | 41,948           |       |
| Income tax benefit (expense)                                   |       | —                                 |       | —                              |       | (17,155                           | )          | —           |       | (17,155          | )          |
| Net (loss) income                                              |       | $                                      | 24,793     |                                | $          | (36                               | )          | $                | 26,533     |             | $          | (26,497 | ) | $ | 24,793 |   |

 

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**MXENERGY HOLDINGS INC.**

**Consolidating Statement of Cash Flows**

**Fiscal Year Ended June 30, 2010**

**(in thousands)**

 
| ** **                                                                                                                     | ** ** | **MXenergy********Holdings Inc.** | ** ** | **Non-guarantor********Subsidiary** | ** ** | **Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Operating activities:**                                                                                                      |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Net income                                                                                                                     |       | $                                      | 11,505     |                                | $          | 290                               |       | $                | 13,579     |             | $          | (13,869 | ) | $ | 11,505 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                                             |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Unrealized gains from risk management activities                                                                               |       | —                                 |       | —                              |       | (27,139                           | )          | —           |       | (27,139          | )          |
| Stock compensation expense                                                                                                     |       | 2,363                                  |       | —                              |       | —                            |       | —           |       | 2,363            |       |
| Provision for doubtful accounts                                                                                                |       | —                                 |       | —                              |       | 5,164                             |       | —           |       | 5,164            |       |
| Depreciation and amortization                                                                                                  |       | —                                 |       | 31                                  |       | 22,143                            |       | —           |       | 22,174           |       |
| Deferred tax expense (benefit)                                                                                                 |       | —                                 |       | —                              |       | 19,102                            |       | —           |       | 19,102           |       |
| Non-cash interest expense, primarily unrealized  (gains) losses on interest rate swaps and amortization of debt issuance costs |       | —                                 |       | —                              |       | 10,146                            |       | —           |       | 10,146           |       |
| Amortization of customer contracts acquired                                                                                    |       | —                                 |       | —                              |       | (50                               | )          | —           |       | (50              | )          |
| Equity in operations of consolidated subsidiaries                                                                              |       | (13,869                                | )          | —                              |       | —                            |       | 13,869           |       | —           |       |
| Changes in assets and liabilities:                                                                                             |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Restricted cash                                                                                                                |       | —                                 |       | —                              |       | 73,794                            |       | —           |       | 73,794           |       |
| Accounts receivable                                                                                                            |       | —                                 |       | 12                                  |       | (6,503                            | )          | —           |       | (6,491           | )          |
| Due from Sempra                                                                                                                |       | —                                 |       | —                              |       | (43,054                           | )          | —           |       | (43,054          | )          |
| Natural gas inventories                                                                                                        |       | —                                 |       | —                              |       | 13,554                            |       | —           |       | 13,554           |       |
| Income taxes receivable                                                                                                        |       | —                                 |       | —                              |       | 398                               |       | —           |       | 398              |       |
| Fixed Rate Notes Escrow Account                                                                                                |       | (8,977                                 | )          | —                              |       | —                            |       | —           |       | (8,977           | )          |
| Other assets                                                                                                                   |       | (29                                    | )          | 26                                  |       | (5,064                            | )          | —           |       | (5,067           | )          |
| Customer acquisition costs                                                                                                     |       | —                                 |       | —                              |       | (21,863                           | )          | —           |       | (21,863          | )          |
| Accounts payable and accrued liabilities                                                                                       |       | (8                                     | )          | (36                                 | )          | (12,751                           | )          | —           |       | (12,795          | )          |
| Deferred revenue                                                                                                               |       | —                                 |       | —                              |       | 3,186                             |       | —           |       | 3,186            |       |
| Net cash (used in) provided by operating  activities                                                                           |       | (9,015                                 | )          | 323                                 |       | 44,642                            |       | —           |       | 35,950           |       |
|                                                                                                                           |       |                                   |       |                                |       |                              |       |             |       |             |       |
| **Investing activities:**                                                                                                      |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Purchases of fixed assets                                                                                                      |       | —                                 |       | —                              |       | (1,328                            | )          | —           |       | (1,328           | )          |
| Purchase of GasKey assets of PS Energy Group, Inc.                                                                             |       | —                                 |       | —                              |       | (433                              | )          | —           |       | (433             | )          |
| Purchase of assets of Vantage Power Services L.P.                                                                              |       |                                   |       |                                |       | (36                               | )          |             |       | (36              | )          |
| Net cash used in investing activities                                                                                          |       | —                                 |       | —                              |       | (1,797                            | )          | —           |       | (1,797           | )          |
|                                                                                                                           |       |                                   |       |                                |       |                              |       |             |       |             |       |
| **Financing activities:**                                                                                                      |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Repayment of Floating Rate Notes due 2011                                                                                      |       | (26,700                                | )          | —                              |       | —                            |       | —           |       | (26,700          | )          |
| Repayment of Floating Rate Notes due 2014                                                                                      |       | (423                                   | )          | —                              |       | —                            |       | —           |       | (423             | )          |
| Repayment of Denham Credit Facility                                                                                            |       | —                                 |       | —                              |       | (12,000                           | )          | —           |       | (12,000          | )          |
| Repayment of Bridge Financing under the Revolving  Credit Facility                                                             |       | —                                 |       | —                              |       | (5,400                            | )          | —           |       | (5,400           | )          |
| Net intercompany transfers                                                                                                     |       | 36,588                                 |       | (201                                | )          | (36,387                           | )          | —           |       | —           |       |
| Debt issuance costs                                                                                                            |       | —                                 |       | —                              |       | (6,248                            | )          | —           |       | (6,248           | )          |
| Acquisition of Class A treasury stock                                                                                          |       | (99                                    | )          | —                              |       | —                            |       | —           |       | (99              | )          |
| Stock issuance costs                                                                                                           |       | (329                                   | )          | —                              |       | —                            |       | —           |       | (329             | )          |
| Net cash provided by (used in) financing  activities                                                                           |       | 9,037                                  |       | (201                                | )          | (60,035                           | )          | —           |       | (51,199          | )          |
|                                                                                                                           |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Net increase (decrease) in cash and cash  equivalents                                                                          |       | 22                                     |       | 122                                 |       | (17,190                           | )          | —           |       | (17,046          | )          |
| Cash and cash equivalents at beginning of period                                                                               |       | —                                 |       | 262                                 |       | 23,004                            |       | —           |       | 23,266           |       |
| Cash and cash equivalents at end of period                                                                                     |       | $                                      | 22         |                                | $          | 384                               |       | $                | 5,814      |             | $          | — |   | $ | 6,220 |   |

 

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**MXENERGY HOLDINGS INC.**

**Consolidating Statement of Cash Flows**

**Fiscal Year Ended June 30, 2009**

**(in thousands)**

 
| ** **                                                                                                                     | ** ** | **MXenergy********Holdings Inc.** | ** ** | **Non-guarantor********Subsidiary** | ** ** | **Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Operating activities:**                                                                                                      |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Net loss                                                                                                                       |       | $                                      | (100,201   | )                                   | $          | (300                              | )          | $                | (99,382    | )                | $          | 99,682 |   | $ | (100,201 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                                                   |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Unrealized losses from risk management activities,  net                                                                        |       | —                                 |       | —                              |       | 87,575                            |       | —           |       | 87,575           |       |
| Stock compensation expense                                                                                                     |       | 519                                    |       | —                              |       | —                            |       | —           |       | 519              |       |
| Provision for doubtful accounts                                                                                                |       | —                                 |       | —                              |       | 12,009                            |       | —           |       | 12,009           |       |
| Depreciation and amortization                                                                                                  |       | —                                 |       | 31                                  |       | 37,544                            |       | —           |       | 37,575           |       |
| Deferred tax expense (benefit)                                                                                                 |       | —                                 |       | —                              |       | (23,406                           | )          | —           |       | (23,406          | )          |
| Non-cash interest expense, primarily unrealized  (gains) losses on interest rate swaps and amortization of debt issuance costs |       | —                                 |       | —                              |       | 16,233                            |       | —           |       | 16,233           |       |
| Amortization of customer contracts acquired                                                                                    |       | —                                 |       | —                              |       | (634                              | )          | —           |       | (634             | )          |
| Equity in operations of consolidated subsidiaries                                                                              |       | 99,682                                 |       | —                              |       | —                            |       | (99,682          | )          | —           |       |
| Changes in assets and liabilities:                                                                                             |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Restricted cash                                                                                                                |       | —                                 |       | —                              |       | (74,781                           | )          | —           |       | (74,781          | )          |
| Accounts receivable                                                                                                            |       | —                                 |       | (28                                 | )          | 28,094                            |       | —           |       | 28,066           |       |
| Natural gas inventories                                                                                                        |       | —                                 |       | —                              |       | 36,509                            |       | —           |       | 36,509           |       |
| Income taxes receivable                                                                                                        |       | —                                 |       | —                              |       | 1,063                             |       | —           |       | 1,063            |       |
| Other assets                                                                                                                   |       | (1,278                                 | )          | 350                                 |       | (7,944                            | )          | —           |       | (8,872           | )          |
| Customer acquisition costs                                                                                                     |       | —                                 |       | 59                                  |       | (14,845                           | )          | —           |       | (14,786          | )          |
| Accounts payable and accrued liabilities                                                                                       |       | —                                 |       | (820                                | )          | (45,733                           | )          | —           |       | (46,553          | )          |
| Deferred revenue                                                                                                               |       | —                                 |       | —                              |       | (3,164                            | )          | —           |       | (3,164           | )          |
| Net cash used in operating activities                                                                                          |       | (1,278                                 | )          | (708                                | )          | (50,862                           | )          | —           |       | (52,848          | )          |
|                                                                                                                           |       |                                   |       |                                |       |                              |       |             |       |             |       |
| **Investing activities:**                                                                                                      |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Purchases of fixed assets                                                                                                      |       | —                                 |       | —                              |       | (1,001                            | )          | —           |       | (1,001           | )          |
| Purchase of assets of Catalyst Natural Gas LLC                                                                                 |       | —                                 |       | —                              |       | (1,609                            | )          | —           |       | (1,609           | )          |
| Purchase of GasKey assets of PS Energy  Group, Inc.                                                                       |       | —                                 |       | —                              |       | (500                              | )          | —           |       | (500             | )          |
| Purchase of assets of Vantage Power Services L.P.                                                                              |       |                                   |       |                                |       | (57                               | )          |             |       | (57              | )          |
| Net cash used in investing activities                                                                                          |       | —                                 |       | —                              |       | (3,167                            | )          | —           |       | (3,167           | )          |
|                                                                                                                           |       |                                   |       |                                |       |                              |       |             |       |             |       |
| **Financing activities:**                                                                                                      |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Proceeds from Denham Credit Facility                                                                                           |       | —                                 |       | —                              |       | 12,000                            |       | —           |       | 12,000           |       |
| Proceeds from Bridge Financing Loans under the  Revolving Credit Facility                                                      |       | —                                 |       | —                              |       | 10,400                            |       | —           |       | 10,400           |       |
| Repayment of Bridge Financing Loans under the  Revolving Credit Facility                                                       |       |                                   |       |                                |       | (5,000                            | )          | —           |       | (5,000           | )          |
| Proceeds from cash advances under the Revolving Credit  Facility                                                               |       | —                                 |       | —                              |       | 30,000                            |       | —           |       | 30,000           |       |
| Repayment of cash advances under the Revolving  Credit Facility                                                                |       | —                                 |       | —                              |       | (30,000                           | )          | —           |       | (30,000          | )          |
| Net intercompany transfers                                                                                                     |       | 1,289                                  |       |                                |       | (1,289                            | )          | —           |       | —           |       |
| Debt issuance costs                                                                                                            |       | —                                 |       | —                              |       | (10,066                           | )          | —           |       | (10,066          | )          |
| Purchase and cancellation of treasury shares                                                                                   |       | (11                                    | )          | —                              |       | —                            |       | —           |       | (11              | )          |
| Net cash provided by financing activities                                                                                      |       | 1,278                                  |       | —                              |       | 6,045                             |       | —           |       | 7,323            |       |
|                                                                                                                           |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Net decrease in cash and cash equivalents                                                                                      |       | —                                 |       | (708                                | )          | (47,984                           | )          | —           |       | (48,692          | )          |
| Cash and cash equivalents at beginning of period                                                                               |       | —                                 |       | 970                                 |       | 70,988                            |       | —           |       | 71,958           |       |
| Cash and cash equivalents at end of period                                                                                     |       | $                                      | —     |                                | $          | 262                               |       | $                | 23,004     |             | $          | — |   | $ | 23,266 |   |

 

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**MXENERGY HOLDINGS INC.**

**Consolidating Statement of Cash Flows**

**Fiscal Year Ended June 30, 2008**

**(in thousands)**

 
| ** **                                                                                                                     | ** ** | **MXenergy********Holdings Inc.** | ** ** | **Non-guarantor********Subsidiary** | ** ** | **Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Operating activities:**                                                                                                      |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Net loss                                                                                                                       |       | $                                      | 24,793     |                                | $          | (36                               | )          | $                | 26,533     |             | $          | (26,497 | ) | $ | 24,793 |   |
| Adjustments to reconcile net loss to net cash used  in operating activities:                                                   |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Unrealized losses from risk management activities,  net                                                                        |       | —                                 |       | —                              |       | (67,168                           | )          | —           |       | (67,168          | )          |
| Stock compensation expense                                                                                                     |       | 1,704                                  |       | —                              |       | —                            |       | —           |       | 1,704            |       |
| Provision for doubtful accounts                                                                                                |       | —                                 |       | —                              |       | 5,050                             |       | —           |       | 5,050            |       |
| Depreciation and amortization                                                                                                  |       | —                                 |       | 36                                  |       | 32,662                            |       | —           |       | 32,698           |       |
| Deferred tax expense (benefit)                                                                                                 |       | —                                 |       | —                              |       | 18,187                            |       | —           |       | 18,187           |       |
| Non-cash interest expense, primarily unrealized  (gains) losses on interest rate swaps and amortization of debt issuance costs |       | —                                 |       | —                              |       | 10,836                            |       | —           |       | 10,836           |       |
| Amortization of customer contracts acquired                                                                                    |       | —                                 |       | —                              |       | (762                              | )          | —           |       | (762             | )          |
| Equity in operations of consolidated subsidiaries                                                                              |       | (26,497                                | )          | —                              |       | —                            |       | 26,497           |       | —           |       |
| Changes in assets and liabilities:                                                                                             |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Restricted cash                                                                                                                |       | —                                 |       | —                              |       | 463                               |       | —           |       | 463              |       |
| Accounts receivable                                                                                                            |       | —                                 |       | 93                                  |       | (35,324                           | )          | —           |       | (35,231          | )          |
| Natural gas inventories                                                                                                        |       | —                                 |       | —                              |       | (7,308                            | )          | —           |       | (7,308           | )          |
| Income taxes receivable                                                                                                        |       | —                                 |       | —                              |       | (7,173                            | )          | —           |       | (7,173           | )          |
| Other assets                                                                                                                   |       | 1,343                                  |       | (194                                | )          | 1,958                             |       | —           |       | 3,107            |       |
| Customer acquisition costs                                                                                                     |       | —                                 |       | (47                                 | )          | (18,146                           | )          | —           |       | (18,193          | )          |
| Accounts payable and accrued liabilities                                                                                       |       | —                                 |       | 981                                 |       | 16,901                            |       | —           |       | 17,882           |       |
| Deferred revenue                                                                                                               |       | —                                 |       | —                              |       | (4,352                            | )          | —           |       | (4,352           | )          |
| Net cash provided by (used in) operating  activities                                                                           |       | 1,343                                  |       | 833                                 |       | (27,643                           | )          | —           |       | (25,467          | )          |
|                                                                                                                           |       |                                   |       |                                |       |                              |       |             |       |             |       |
| **Investing activities:**                                                                                                      |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Purchases of fixed assets                                                                                                      |       | —                                 |       | —                              |       | (1,959                            | )          | —           |       | (1,959           | )          |
| Loan to PS Energy Group, Inc. related to  purchase of GasKey assets                                                       |       | —                                 |       | —                              |       | (8,983                            | )          | —           |       | (8,983           | )          |
| Cash received from PS Energy Group, Inc. for  repayment of loan                                                           |       | —                                 |       | —                              |       | 8,983                             |       | —           |       | 8,983            |       |
| Purchase of GasKey assets from PS Energy  Group, Inc.                                                                     |       | —                                 |       | —                              |       | (13,011                           | )          | —           |       | (13,011          | )          |
| Purchase of assets of Vantage Power Services L.P.                                                                              |       |                                   |       |                                |       | (778                              | )          |             |       | (778             | )          |
| Net cash used in investing activities                                                                                          |       | —                                 |       | —                              |       | (15,748                           | )          | —           |       | (15,748          | )          |
|                                                                                                                           |       |                                   |       |                                |       |                              |       |             |       |             |       |
| **Financing activities:**                                                                                                      |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Repayment of Denham Credit Facility                                                                                            |       | (11,040                                | )          | —                              |       | —                            |       | —           |       | (11,040          | )          |
| Repurchase of Floating Rate Notes due 2011                                                                                     |       | (12,006                                | )          | —                              |       | —                            |       | —           |       | (12,006          | )          |
| Issuance of common stock from exercise of warrants  and options                                                                |       | 387                                    |       | —                              |       | —                            |       | —           |       | 387              |       |
| Issuance of common stock from other executive  compensation                                                                    |       | 952                                    |       | —                              |       | —                            |       | —           |       | 952              |       |
| Net intercompany transfers                                                                                                     |       | 21,119                                 |       |                                |       | (21,119                           | )          |             |       |             |       |
| Debt issuance costs                                                                                                            |       | —                                 |       | —                              |       | (1,307                            | )          | —           |       | (1,307           | )          |
| Purchase and cancellation of treasury shares                                                                                   |       | (755                                   | )          | —                              |       | —                            |       | —           |       | (755             | )          |
| Net cash used in financing activities                                                                                          |       | (1,343                                 | )          | —                              |       | (22,426                           | )          | —           |       | (23,769          | )          |
|                                                                                                                           |       |                                   |       |                                |       |                              |       |             |       |             |       |
| Net decrease in cash and cash equivalents                                                                                      |       | —                                 |       | 833                                 |       | (65,817                           | )          | —           |       | (64,984          | )          |
| Cash and cash equivalents at beginning of period                                                                               |       | —                                 |       | 137                                 |       | 136,805                           |       | —           |       | 136,942          |       |
| Cash and cash equivalents at end of period                                                                                     |       | $                                      | —     |                                | $          | 970                               |       | $                | 70,988     |             | $          | — |   | $ | 71,958 |   |

 

***Note 25. Subsequent Events***

 

TheCompany has evaluated subsequent events for the period from July 1, 2010through the date on which these consolidated financial statements wereissued.  Based upon this evaluation,there were no material events or transactions during this period that requiredrecognition or disclosure in these consolidated financial statements.

 

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**ITEM 9.  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM9A(T).  CONTROLS AND PROCEDURES**

 

**DisclosureControls**

 

Wemaintain a system of internal control over financial reporting and disclosurecontrols and procedures designed to ensure that information required to bedisclosed in reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms, and accumulated andcommunicated to our management, including our Chief Executive Officer and ourChief Financial Officer, to allow timely decisions regarding requireddisclosure.  Our Board of Directors,operating through its Audit Committee, also provides oversight to the financialreporting process.

 

Anevaluation was conducted, with the participation of the Chief Executive Officerand Chief Financial Officer, of the effectiveness of our disclosure controlsand procedures as of the end of the period covered by this Annual Report.  Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures were not effective, as of the end of the period covered by thisreport, due to the material weakness in our internal control over financialreporting described below.

 

Indesigning and evaluating our disclosure controls and procedures, our managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management necessarily is required to apply itsjudgment in designing and evaluating the controls and procedures. We regularlyreview our disclosure controls and procedures, and our internal control overfinancial reporting, and may from time to time make appropriate changes aimedat enhancing their effectiveness and ensure that our systems evolve with ourbusiness.

 

**Management’sAnnual Report on Internal Control Over Financial Reporting**

 

Ourmanagement is responsible for establishing and maintaining an adequate systemof internal control over financial reporting, as such term is defined in Rules 13a-15(f) and15d-15(f) of the Exchange Act.  Because of its inherent limitations, internal control over financialreporting cannot provide absolute assurance of achieving financial reportingobjectives. Internal control over financial reporting is a process thatinvolves human diligence and compliance and is subject to lapses in judgmentand breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented bycollusion or improper management override. Because of such limitations, there is a risk that material misstatementsmay not be prevented or detected on a timely basis by internal control overfinancial reporting.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions or thatthe degree of compliance with established policies or procedures maydeteriorate.

 

Ourmanagement carried out an evaluation of the effectiveness of our internalcontrol over financial reporting as of the end of the period covered by thisAnnual Report, with the participation of our Chief Executive Officer and ChiefFinancial Officer, using the criteria as required by Section 404 of theSarbanes-Oxley Act, management, including testing using the criteria inInternal Control — Integrated Framework, issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”).   Based upon their evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that there is amaterial weakness in our internal control over financial reporting.  A material weakness is a deficiency, or acombination of deficiencies, in internal control over financial reporting suchthat there is a reasonable possibility that a material misstatement of theCompany’s annual or interim financial statements will not be prevented ordetected on a timely basis.

 

Inour Annual Report on Form 10-K for the fiscal year ended June 30,2009, we reported our conclusion that a combination of significantdeficiencies, when considered in the aggregate, constituted a material weaknessin our internal control over financial reporting.  For certain of the deficiencies noted as of June 30,2009, we instituted and tested new controls and processes, which we concludedwere effective during fiscal year 2010.

 

Certainprior deficiencies still exist as of June 30, 2010, resulting inadjustments to our accounting records at June 30, 2010 for amounts thatrelated to quarterly and annual periods previously reported.  These adjustments were not deemed bymanagement to be material, individually or in the aggregate, in relation to ourfinancial position or results of operations, taken as a whole, for any annualor quarterly reporting period during fiscal years 2010 or 2009.  However, we concluded that

 

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thedeficiency continues to be a material weakness in the design and operation ofour internal controls over financial reporting as of June 30, 2010 suchthat there was a reasonable possibility that a material misstatement of ourinterim or annual financial statements would not have been prevented ordetected on a timely basis.  As of June 30,2010, we have instituted enhanced processes and controls to remediate theoutstanding deficiencies.    However, assome of the new controls were completed late in our fiscal year, we have notyet adequately tested the effectiveness of the controls for all markets.

 

TheCompany’s management based its evaluation on criteria set forth in theframework in Internal Control—Integrated Framework issued by the COSO.  Based on that assessment, management hasconcluded that the Company’s internal control over financial reporting was noteffective as of June 30, 2010.

 

ThisAnnual Report does not include an attestation report of our registered publicaccounting firm regarding internal control over financial reporting.  Management’s report was not subject toattestation by our registered public accounting firm pursuant to rules ofthe Securities and Exchange Commission that permit the company to provide onlymanagement’s report in this Annual Report.

 

**Changes in Internal Controls over Financial Reporting**

 

Otherthan the remediation steps described above, there have been no changes in oursystem of internal control over financial reporting during the year ended June 30,2010, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**ITEM 9B.OTHER INFORMATION**

 

None.

 

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**PART III.**

 

**ITEM10.  DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE**

 

**ExecutiveOfficers and Directors**

 

Asof July 27, 2010, our Board of Directors consists of nine members.  All of our executive officers serve at thediscretion of our Board of Directors, subject to their employment agreementsdescribed under “Item 11. Executive Compensation.”

 

Thenames and positions of our executive officers as of July 27, 2010 arepresented in the following table. Descriptions of the business experience of our executive officers anddirectors follow the table.

 
| **Name**             | ** ** | **Age** | ** ** | **Position**                               |
|----------------------|------------|---------|------------|--------------------------------------------|
|                 |       |    |       |                                       |
| Jeffrey  A. Mayer    |       | 58      |       | President,  CEO and Director               |
| Chaitu  Parikh       |       | 41      |       | Executive  Vice President and CFO          |
| Robert  Blake        |       | 54      |       | Senior  Vice President, Regulatory Affairs |
| Gina  Goldberg       |       | 52      |       | Senior  Vice President, Marketing          |
| Ronnie  V. Shields   |       | 47      |       | Vice  President and Controller             |
| Robert  Werner       |       | 54      |       | Senior  Vice President, Supply             |
| Mark  Bernstein      |       | 40      |       | Director                                   |
| Carl  Adam Carte     |       | 40      |       | Director                                   |
| James  N. Chapman    |       | 48      |       | Director                                   |
| Michael  J. Hamilton |       | 63      |       | Director                                   |
| William  Landuyt     |       | 54      |       | Director                                   |
| Randal  T. Maffett   |       | 49      |       | Director                                   |
| Jacqueline  Mitchell |       | 49      |       | Director                                   |
| Jonathan  Moore      |       | 50      |       | Director                                   |

 

**Jeffrey A. Mayer** is a co-founder of theCompany and has been President and CEO since 1999.  He has served as a director of Holdings since2005. From 1992 to 1999, Mr. Mayer worked for Sempra Trading Corporation,a subsidiary of Sempra Energy (prior to 1997, known as AIG Trading Corporation,a subsidiary of AIG), and served as its Managing Director in charge of naturalgas derivatives marketing. Mr. Mayer also served as Chairman of AIG Clearing Corporation, thefutures clearing arm of AIG Trading and Chairman of AIG Securities Corporation,the securities affiliate of AIG Trading. Prior to joining AIG, Mr. Mayer worked at Goldman, Sachs &Co. where he managed the Energy Futures Department from 1989 to 1992, worked inthe Futures Services Department from 1987 to 1989 and served as Chief Counselof its J. Aron Commodities Division from 1984 to 1987.  From 1978 to 1983, Mr. Mayer was anassociate with the New York law firm of Barrett, Smith, Shapiro &Armstrong.  Mr. Mayer served as amember (from 1997 to 2009) and as Chairman (from 2005 to 2009) of the Board ofFinance of Westport, CT.

 

**Chaitu Parikh** currently serves asExecutive Vice President and has been CFO of the Company since July 2004.  Mr. Parikh also serves as the Company’sPrincipal Financial Officer. Mr. Parikh served as Vice President of Finance of the Company fromDecember 2002 to July 2004. Prior to joining the Company, Mr. Parikh served as Vice Presidentand Controller of The New Power Company from October 2001 toDecember 2002 and as the Chief Financial Officer of Alliance EnergyServices from December 1996 to July 2001.  Previously, Mr. Parikh served in publicaccounting with KPMG from 1991 to 1996. Mr. Parikh holds a Chartered Accountant designation from theCanadian Institute of Chartered Accountants.

 

**Robert Blake** currently serves as theCompany’s Senior Vice President of Regulatory Affairs.  Mr. Blake served as the Company’s VicePresident of Electricity Operations and Regulatory Affairs from 2004 to May 2010and as Vice President of Customer Operations from April 2001 toMay 2004.  Prior to joining theCompany, Mr. Blake served as Manager of United Energy fromJanuary 2000 to March 2001, and served as Regional Sales Director forConectiv Energy from April 1998 to January 2000.  From 1980 to March 1998, Mr. Blakeworked for United Illuminating, an electric utility in Connecticut, where heserved as Director of Commercial & Industrial Energy Services.  He has been involved with numerous nationaland regional electricity and energy committees and has held leadershippositions with several regional energy groups, including chairing a NEPOOL taskforce.

 

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**Gina Goldberg**has been Senior VicePresident of Sales and Marketing of the Company since May 2010 andwas Vice President of Sales and Marketing from 2004 to 2010.  Prior to joining the Company as a consultantin November 2003, Ms. Goldberg held various marketing positions atShowtime Networks Inc. from 1984 to 2003, including the position of Senior VicePresident of Marketing from 1998 to 2003. Ms. Goldberg also served as a member of the Viacom Inc. MarketingBoard Council from 1998 to 2003. Previously, Ms. Goldberg worked in the Marketing Department of TheDallas Morning News from 1981 to 1984.

 

**RonnieV. Shields**currently serves as the Company’s Vice President andController.  He has served as Controllerof the Company since August 2006.  Mr. Shieldsalso serves as the Company’s Principal Accounting Officer.  Prior to joining the Company, Mr. Shieldsserved as Controller for Shell Energy Services from 2003 to 2006 and AssistantController of The New Power Company from 2000 to 2003.  Mr. Shields was Treasurer for HenleyHealthcare, Inc., a publicly registered manufacturer of medical devices,from 1998 to 2000 and Vice President of Finance for Wilson Financial Group, aprivately held company that acquired and managed funeral homes and cemeteries,from 1996 to 1998.  From 1988 to 1996 Mr. Shieldsworked in the audit and business advisory practice of Arthur Andersen LLP,where he served a variety of clients across several industries.

 

**Robert Werner** has been Senior VicePresident of Supply of the Company since May 2010 and was Vice Presidentof Supply from 2006 to 2010.  Prior tojoining the Company, Mr. Werner had a 28-year career with Royal DutchShell in energy trading, supply chain management, and pipeline engineering andoperations.  From 2002 to 2006,Mr. Werner served as Vice President of Supply for SESCo, responsible fornatural gas supply, commodity price exposure management and pricing.  Prior to completing a two-year assignment intrading process and systems redesign in 2002, Mr. Werner spent 14 years ina variety of roles trading crude oil in the United States, Africa, Europe andSouth America.  Mr. Werner is aretired professional engineer in the State of California.

 

**MarkBernstein** has served as a director of Holdings since September 2009and currently serves on the Audit Committee and the Executive, Compensation andGovernance Committee.  He is ChiefInvestment Officer of Private Investment X, LLC, a Houston-based private equityfirm he founded in 2009 to acquire assets in the oil and gas industry.  From 2006 until 2008, Mr. Bernsteinserved as Vice President of Constellation Energy Group, Inc., where hefocused on upstream principal investments. In 2005, Mr. Bernstein consultedfor Davis Petroleum Corp. regarding the establishment of the company’s riskmanagement operations and recapitalization efforts.  From 2002 until 2004, Mr. Bernstein wasa founding principal of National Bank of Canada’s global risk management groupin Houston.  From 1996 until 2001, Mr. Bernsteinwas a Director at Enron Corp., working in the wholesale power division until2001 when his focus changed to Enron Energy Services, a retail electricityprovider.  In 1995, Mr. Bernsteinworked for Banc One Corp. Mr. Bernstein’s experience in the oil and gasindustry, including his experience in retail energy, and his experience andleadership with risk management activities at various organizations, make himwell-qualified to serve on the Company’s Board of Directors.

 

**CarlAdam Carte** was appointed as a director of Holdings in May 2010and currently serves on the Audit Committee and the Risk OversightCommittee.  Mr. Carte is a founding member and currently a partner ofFairlead Advisors LLC, where he provides strategic, commercial, valuation andfinancial expertise to private equity clients. From 2008 to 2010, Mr. Carte provided similar strategic, valuationand financial expertise to clients of Alea Management LLC, which he alsoco-founded.  Mr. Carte was the chieffinancial officer of The Trigen Companies from 2006 to 2008. From 2008 to 2005,Mr. Carte was the Vice President and Treasurer for Texas-New MexicoPower/First Choice Power, an electric utility and retail electric providerserving approximately 275,000 customers based in Fort Worth, Texas.  From 1993 to 2003, Mr. Carte worked atNRG Energy, Inc., where he served in various financial positions,including Vice President and Treasurer.  Mr. Carte holds theChartered Financial Analyst (CFA) designation and is a Certified TreasuryProfessional (CTP).  He also serves on the board of directors of EuroBioenergy Holdings S.a.r.l., a privately held biomass energy company thatoperates in Germany.  Mr. Carte’s extensive experience in the energyindustry and experience in various finance and treasury roles makes him wellqualified to serve on the Company’s Board of Directors.

 

**James N. Chapman** has served as a director ofHoldings since September 2009 and currently serves as Chairman of theExecutive, Compensation and Governance Committee and as a member of the Risk

 

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OversightCommittee.  He is non-executive Vice Chairman of SkyWorks Leasing, LLC, anaircraft management services company based in Greenwich, Connecticut, which hejoined in December 2004.  From 2003 until 2004, Mr. Chapman wasassociated with Regiment Capital Advisors, LP, an investment advisor based inBoston specializing in high yield investments.  From 2001 until 2003, Mr. Chapmanacted as a capital markets and strategic planning consultant with private andpublic companies, as well as investment advisers and hedge funds, across arange of industries.  Mr. Chapman presently serves as a memberof the board of directors of AerCap Holdings NV, American Media, Inc.,Hayes-Lemmerz International, Inc., Scottish Re Group Limited, Tembec Inc.and Neenah Enterprises, Inc.   Mr. Chapman served as adirector of LNR Property Corporation from November 2008 until July 2010.  Mr. Chapman also serves on the FinanceCommittee of The Whitby School in Greenwich, CT.  Mr. Chapman’s extensive experience inthe capital markets and strategic planning, coupled with his board experience formany companies, makes him well-qualified to serve on the Company’s Board ofDirectors.

 

**Michael J. Hamilton**was elected as a director ofHoldings in March 2008, and currently serves as Chairman of the Board ofDirectors, Chairman of the Audit Committee and as a member of the Executive,Compensation and Governance Committee. Mr. Hamilton served as Chairman and Chief Executive Officer of MMCEnergy, Inc., a publicly traded merchant electricity generator that ownedseveral generating units in California, until September 2009.  Previously, Mr. Hamilton was the partnerin charge of utility audit and tax at PricewaterhouseCoopers until he retiredin 2003.  He then served as a seniormanaging director at FTI Consulting where he specialized in bankruptcy and restructuringwork, primarily in the merchant power industry. Mr. Hamilton is a certified public accountant with additionalcertifications in business valuation and financial forensics and is a certifiedturnaround professional. Mr. Hamilton is also a director of MMC Energy, Inc.,Seven Arts Entertainment, Inc. and Gradient Resources (formerly VulcanPower Company).   Mr. Hamilton’sextensive experience in the energy industry and in public accounting makes himwell-qualified to serve on the Company’s Board of Directors.

 

**William Landuyt**currently serves as adirector of Holdings and****hasserved as a director of the Company since 2004. Mr. Landuyt currently serves on the Executive, Compensation andGovernance Committee.  Mr. Landuytis currently a managing director at Charterhouse Group, Inc., where he wasalso Senior Partner from 2003 to 2009. From 1996 to 2003, Mr. Landuyt served as the Chief ExecutiveOfficer and Chairman of the Board of Millennium Chemicals, Inc.  Mr. Landuyt was previously employed byHanson Industries where he served as President and Chief Executive Officer fromJune 1995 to October 1996. Mr. Landuyt held the positions of Finance Director of Hanson Plcfrom 1992 to May 1995 and Director of Hanson Plc from 1992 to October 1996.  Mr. Landuyt served as Vice President andChief Financial Officer of Hanson Industries from 1988 to 1992.  Mr. Landuyt has served as a director ofvarious Charterhouse portfolio companies since 2005, including Charter Lason, Inc.,Top Image Systems, Ltd., Cellu Tissue Holdings, Inc., Charter Towne, Inc.,Charter NewPath, LLC and AAT Communications Corp.  Mr. Landuyt’s extensive experience inCEO and CFO roles with various companies, and his long-standing position as adirector of the Company, makes him well-qualified to serve as a director of theCompany.

 

**RandalT. Maffett** has served as a director of Holdings since September 2009and currently serves as Chairman of the Risk Oversight Committee and as amember of the Audit Committee.  In 2004,he founded Sendero Capital Partners, Inc., a private equity firm focusedon investments, acquisitions and operations in the upstream and midstreamsectors of the oil and gas industry, renewable energy and power generationindustries, and is currently serving as its President and CEO.  From 2002 until 2004, Mr. Maffett washead of the newly formed North American business development group of RWEAG.  From 1993 until 2002, Mr. Maffettwas responsible for multiple business units, including Enron North America,Enron International, Enron Strategic Ventures and Enron Global Markets, as wellas for Enron’s corporate restructuring group where he focused on restructuringunder-performing assets and companies, both public and private.  From 1989 until 1993, Mr. Maffett managedfuel requirements, long-term supply contract negotiations and power marketingfor Altresco Financial, Inc., a cogeneration development company.  From 1987 until 1989, Mr. Maffett builtand managed the deregulated gas marketing and trading business of LaddPetroleum.  During the past five years Mr. Maffetthas held board seats at Sendero Capital Partners, Inc. (and itsaffiliates), Southern Missouri Natural Gas and Nexus Resources, LLC.  Mr. Maffett’s extensive experience withvarious companies in the energy industry makes him well-qualified to serve onthe Company’s Board of Directors.

 

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**Jacqueline (“Jackie”) Mitchell** was appointed as a directorof Holdings in March 2010 and currently serves on the Risk OversightCommittee and the Executive, Compensation and Governance Committee.  Ms. Mitchellhas been Senior Managing Director at RBS Sempra since 1992, where she overseesthe North American natural gas trading and marketing operations.  Ms. Mitchellalso serves as Chief Executive Officer and a director of Sempra Energy TradingMexico.  Prior to 1992, Ms. Mitchellworked for EnTrade Corporation.  Ms. Mitchell’s in-depthunderstanding of natural gas commodity markets and related risk managementactivities makes her well-qualified to serve on the Company’s Board ofDirectors.

 

**JonathanMoore** has served as a director of Holdings since September 2009 andcurrently serves on the Risk Oversight Committee.  He has served as Executive Vice President atBeowulf Energy LLC since 2008.  In 2006, Mr. Moorefounded Juice Energy, Inc., a green-focused energy retailer, where heserved as CEO from 2006 to 2008 and currently serves as a director.  From 2002 until 2006, Mr. Moore was COOof Constellation NewEnergy.  From 1994 until 2002, Mr. Moore workedfor The AES Corporation, where he was part of the senior management teamresponsible for AES’ acquisition of NewEnergy Ventures, one of the firstcompetitive suppliers of retail electricity. Mr. Moore worked as a transactional attorney with O’Melveny &Myers in Washington, D.C. from 1988 to 1994. Mr. Moore’s extensive experience in the energy industry, includinghis experience in retail energy, makes him well-qualified to serve as adirector of the Company.

 

**Committeesof the Board of Directors**

 

Asof July 27, 2010, our Board of Directors had appointed three committees tohelp carry out its duties: the Audit Committee, the Executive, Compensation andGovernance Committee (the “ECG Committee”) and the Risk Oversight Committee.

 

TheAudit Committee makes recommendations to the Board of Directors regarding theselection of independent auditors, reviews the results and scope of audit and otherservices provided by our independent auditors and reviews and evaluates ourinternal audit and control functions. The Audit Committee also meets with our outside auditors shortly afterthe end of each quarterly and year-end reporting period, reviews financialreports prepared in accordance with U.S. GAAP and SEC regulations andrecommends that the Board of Directors approve such reports for filing with theSEC.

 

Asof July 27, 2010, the Audit Committee consists of Messrs. Hamilton****(Chair), Bernstein, Carte andMaffett.  The Board of Directors hasdetermined that all current members of the Audit Committee, as well as Messrs. Chapmanand Landuyt and Ms. Mitchell, qualify as financial experts within themeaning of the SEC rules.  The Board ofDirectors has further determined that all current members of the AuditCommittee are independent.

 

TheECG Committee: (i) administers our employee stock and other benefit plansand makes decisions concerning salaries and incentive compensation for ouremployees, and (ii) identifies and recommends qualified individuals toserve as board and committee members, monitors the effectiveness of the Boardof Directors and its committees and establishes the corporate governanceguidelines for the Company.  As of July 27,the ECG Committee consists of Messrs. Chapman (Chair), Bernstein, Hamiltonand Landuyt and Ms. Mitchell.

 

TheRisk Oversight Committee establishes and provides oversight of the Company’srisk management policies. As of July 27, the Risk Oversight Committeeincludes Messrs. Maffett (Chair), Carte, Chapman and Moore, and Ms. Mitchell.

 

**BoardLeadership Structure and Role in Risk Oversight**

 

Weseparate the roles of CEO and Chairman of the Board of Directors inrecognition of the differences between the two roles.  The CEO is responsible for setting thestrategic direction for the Company and the day-to-day leadership andperformance of the Company, while the Chairman of the Board of Directorsprovides guidance to the CEO, sets the agenda for Board of Directors meetingsand presides over meetings of the full Board of Directors.  In connection with the Restructuring, theshareholders of the Company voted to appoint Mr. Hamilton, an independentdirector who is not otherwise employed in any capacity by the Company, as Chairmanof the Board of Directors.  One executiveofficer of the Company, the CEO, also serves as a director.

 

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Asdiscussed in “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Risk Management,” the Risk Oversight Committee isprimarily responsible for establishing risk management policies and overseeingcompliance therewith.  Risk managementpolicies are reviewed at least annually to ensure that material risksassociated with new products, asset acquisitions, current market and otherchanges in our risk profile are adequately addressed.  The Risk Oversight Committee meets at leasttwice annually, and as often as necessary, to address the Company’s riskmanagement activities and positions.  TheRisk Oversight Committee is chaired by an independent director, and includesfive additional directors, including our CEO, as well as our CFO.  We also have an independent risk managementdepartment that is responsible for monitoring and enforcing risk managementpolicies related to commodities hedging activities.

 

**Code ofEthics**

 

Wehave adopted a Code of Business Conduct and Ethics (the “Code of Ethics”),which applies to our directors, officers and employees that meets thedefinition of a code of ethics required by Item 406 of Regulation S-Kpromulgated under the Exchange Act.  Thepurpose of the Code of Ethics is to promote a culture of honesty, integrity andrespect for the law and the people who work at and with the Company.  A copy of the Code of Ethics is available onour website at www.mxholdings.com under the Corporate Governance link.  We intend to timely disclose any amendmentsto or waivers of certain provisions of the Code of Ethics applicable to ourdirectors, executive officers, including our principal executive officer,principal financial officer and principal accounting officer on our website.

 

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**ITEM 11.  EXECUTIVE COMPENSATION**

 

**CompensationCommittee Report**

 

TheECG Committee has reviewed and discussed with management the following “CompensationDiscussion and Analysis,” (“CD&A”) section required by Item 402(b) ofRegulation S-K promulgated under the Exchange Act.  Based on such review and discussion withmanagement, the ECG Committee recommended to the Board of Directors that the CD&Abe included in the Company’s Annual Report.

 

TheExecutive, Compensation and Governance Committee

 

JamesChapman (Chair)

MarkBernstein

MichaelJ. Hamilton

WilliamLanduyt

JacquelineMitchell

 

*Theinformation contained in the ECG Committee Report shall not be deemed to be “solicitingmaterial” or to be “filed” with the SEC, nor shall such information beincorporated by reference into any future filings under the Securities Act orthe Exchange Act, except to the extent that we specifically incorporate it byreference in such filing.*

 

**CompensationDiscussion and Analysis for Named Executive Officers**

 

Asused herein, “named executive officers” refers to our CEO, our CFO and thethree executive officers, other than the CEO and CFO, who were our most highlycompensated executive officers for the fiscal year ended June 30, 2010.

 

***Overview of Our Compensation Philosophy andObjectives***

 

Thecompensation of our named executive officers is based in part on the terms ofour employment agreements with them and in part on our “pay-for-performance”philosophy on both an individual and corporate level.  We have adopted an approach to compensationthat includes a mix of short-term and long-term components that are designed toprovide proper incentives and to reward our senior management team forindividual and corporate performance.

 

Ourintent regarding the compensation of our executive officers is to providesalary and incentives that:

 

·                  motivate executive officers to increaseshareholder value;

·                  attract and retain talented and experiencedexecutive officers;

·                  motivate executive officers to manage ourbusiness to meet our short-term and long-term business objectives; and

·                  align compensation with the achievement ofcertain short-term and long-term individual and corporate objectives.

 

***Role of Our ECG Committee***

 

OurECG Committee is responsible for administering our compensation practices. OurECG Committee consists of up to five directors who are “outside directors” forpurposes of Section 162(m) of the Internal Revenue Code, as amended(the “Code”).  The ECG Committee has beencharged by the Board of Directors with the following overall responsibilities,among others:

 

·                  Approval and evaluation of executive officercompensation policies, plans, and programs;

·                  Approval, oversight and evaluation ofequity-based compensation plans, including without limitation, stock-basedcompensation plans, in which officers or employees may participate;

·                  Approve arrangements with executive officersrelating to their employment relationships with the Company, including, withoutlimitation, employment agreements and restrictive covenants;

 

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·      Setting annualperformance goals for the Company, which are used to establish performancegoals for the named executive officers and other senior officers; and

·                  Review and approval of ERISA and othersignificant employee benefit plans.

 

TheECG Committee considers compensation recommendations from our CEO indetermining executive compensation for all of the named executive officers,except in the case of the CEO.  The ECGCommittee, at its sole discretion, may accept or deny, in whole or in part, therecommendations of the CEO.  Theactivities of the ECG Committee are formally reported to the Board ofDirectors, and board members are encouraged to ask questions and reviewspecific details regarding the decisions of the ECG Committee.  The Board of Directors is not required toapprove the decisions of the ECG Committee.

 

***Elements of Executive Compensation***

 

Thecompensation of our named executive officers consists primarily of thefollowing components:

 

·                  Annual basesalary;

·                  Participationin incentive-based compensation plans;

·                  Participationin equity-based compensation plans;

·                  Awards of anyspecial or supplemental benefits; and

·                  Awards ofseverance and other termination benefits.

 

Weuse a mix of short-term compensation (annual base salaries and incentive-basedcompensation) and long-term compensation (equity-based compensation) to providea total compensation structure that is designed to achieve our pay-for-performancephilosophy and other compensation objectives. Although the ECG Committee has not adopted any formal guidelines forallocating total compensation between short-term and long-term portions, webelieve it is important for our executive officers to have some actual orpotential equity ownership to provide them with long-term incentives to improvecorporate performance.

 

Themembers of our ECG Committee are involved with a portfolio of companies ofvarious sizes from which they can assess the appropriateness of executivecompensation levels.  In addition, theyare provided with performance data on named executives and the Company’sperformance both of which enable thorough decision-making.

 

**AnnualCash Compensation**

 

***Annual Base Salary***

 

Webelieve that a competitive base salary is a necessary element of anycompensation program designed to attract and retain talented and experiencedexecutives, and to motivate and reward executives for their overallperformance.  In general, the basesalaries of our named executive officers reflect:

 

·                  the initial base salaries that we negotiatedwith each of them at the time of their initial employment or promotion;

·                  consideration of individual performance andincreased experience;

·                  any changes in their appointed roles andresponsibilities;

·                  consideration of the individual’scontribution toward overall business performance;

·                  annual cost of living adjustment factors;

·                  results of any benchmarking initiatives tocompare executive salaries to peer group companies;

·                  experience of the members of the ECGCommittee with executive salaries at other companies; and

·                  recommendations of the CEO, except in thecase of the CEO.

 

Thebase salaries of our executive officers are reviewed and evaluated for possibleadjustment annually after their performance evaluations are completed.

 

Basesalaries for our named executive officers are summarized in the followingtable:

 

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| ** **                 | ** ** | **Salary as of June 30,** | ** ** |
|----------------------------|------------|-----------------------------------------------|------------|
| **Name**                   | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
|                       |       |                                          |       |   |   |
| Jeffrey Mayer              |       | $                                             | 594,825    |   | $ | 594,825 |   |
| Chaitu Parikh              |       | 450,000                                       |       | 421,785 |   |
| Robert Blake               |       | 225,000                                       |       | 225,000 |   |
| Gina Goldberg              |       | 281,865                                       |       | 281,865 |   |
| Robert Werner              |       | 300,000                                       |       | 250,000 |   |
| Carole R. Artman-Hodge (1) |       | —                                        |       | 390,000 |   |
|                            |            |                                               |            |  |  |  |  |

 

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(1)            EffectiveMay 14, 2010, Ms. Artman-Hodge, the Company’s former EVP, was no longeremployed by the Company.

 

Afterconsidering fiscal year 2009 financial and operating results, including theimpacts of the Restructuring, the Board of Directors did not approve any salaryincreases for any of the named executive officers for the beginning of fiscalyear 2010.  However, in May 2010, theCompany entered into an amendment to the employment agreement with ChaituParikh, which provided for an increase in Mr. Parikh’s annual base salary to$450,000 due to his increased responsibilities and authority.  In April 2010, the Company entered into anagreement with Robert Werner, which provided for an increase in Mr. Werner’sannual base salary to $300,000 due to his increased responsibilities andauthority.

 

***Annual Incentive-Based Compensation***

 

Ournamed executive officers have the opportunity to receive cash incentive awardstied to our company’s overall performance and their individual performance.

 

Specificperformance goals for the named executive officers are established for thepayment of annual incentive-based compensation, which are based on the specificindividual and business performance factors described below.  The establishment of business and individualgoals for each named executive officer reinforces three of our compensationgoals: (1) to increase shareholder value; (2) to motivate our namedexecutive officers toward even higher achievement and business results; and(3) to enable us to attract and retain highly qualified individuals.

 

IndividualPerformance Factors (“IPFs”) represent ratings assigned to the named executiveofficers that are based on several performance factors and accomplishment ofindividual goals.  IPFs are calculatedafter a systematic review of each named executive officer, which results inassessment of specific accomplishments and job skills that generally fallwithin the following categories: (1) leadership, team management andorganizational skills; (2) primary job responsibilities; (3) judgmentand decision-making; (4) individual accomplishments; (5) peerrelationships; and (6) industry, departmental and company knowledge.  Mr. Mayer is evaluated by the ECGCommittee, while the other named executive officers are evaluated by the CEO**.**  For all namedexecutive officers, the overall IPF rating is applied to 25% of their targetbonus.  The ECG Committee reviews andapproves IPFs for the named executive officers.

 

BusinessPerformance Factors (“BPFs”)**representcorporate operational goals that are considered to be essential to our successfor the fiscal year.  BPFs are used toassess corporate performance and result in a weighted resultant businessfactor, which is generally assigned to all employees.  For all named executive officers, the BPFrating is applied to 75% of their target bonus. The BPFs for the fiscal year ended June 30, 2009 were as follows:

 

·                  34% weighting for achievement of targetedlevels of RCEs at June 30, 2010;

·                  33% weighting for operational excellence,which is measured by accomplishment of key business performance factors; and

·                  33% weighting for achievement of AdjustedEBITDA for fiscal year 2010.

 

Theweighted resultant business factor is applied to that portion of the namedexecutive officer’s bonus that is subject to the BPF weighting.  That cumulative result is then furtheradjusted for the named executive officer’s IPF rating.

 

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Incentive-basedcompensation accrued for the named executive officers for the fiscal year endedJune 30, 2010, and paid by the Company during fiscal year 2011, issummarized in the following table.

 
| ** **                 | ** ** | **Target % of  Salary** | ** ** | **Actual Payout**    | ** ** |
|----------------------------|------------|-----------------------------------|------------|---------------------------|------------|
| **Name**                   | ** ** | **(1)**                           | ** ** | **% of Salary** | ** ** | **Amount** | ** ** |
|                       |       |                              |       |                      |       |   |   |
| Jeffrey Mayer              |       | 100                               | %          | 76                        | %          | $ | 450,000 |   |
| Chaitu Parikh              |       | 100                               | %          | 94                        | %          | 425,000 |   |
| Robert Blake               |       | 50                                | %          | 78                        | %          | 175,000 |   |
| Gina Goldberg              |       | 50                                | %          | 106                       | %          | 300,000 |   |
| Robert Werner              |       | 100                               | %          | 133                       | %          | 400,000 |   |
| Carole R. Artman-Hodge (2) |       | —                            |       | —                    |       | — |   |
|                            |            |                                   |            |                           |            |  |  |  |

 

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(1)   Based uponemployment agreements in place as of June 30, 2010.

(2)   Effective May14, 2010, Ms. Artman-Hodge, the Company’s former EVP, was no longer employed bythe Company.  Her severance paymentincluded a prorated bonus for fiscal year 2010.

 

**Equity-BasedCompensation**

 

Stock-basedawards provide our executive officers, employees and other individuals who haveprovided services to us with the opportunity to own an equity interest in theCompany. Stock-based awards are an important component in our executivecompensation program because we benefit from dedicated employees who takeownership pride in its business.  Decisionsregarding the amount and timing of stock option awards are made: (1) atthe time of the executive’s employment; (2) upon periodic review; or(3) on rare occasions, following a significant event such as anacquisition.

 

TheCEO makes recommendations to the ECG Committee regarding stock-based awards toall named executive officers, which are based on the followingconsiderations:  (1) the officer’spast performance; (2) future responsibilities and expectations of theofficer during the vesting period for the awards; (3) retention concerns,if any; (4) rating of the officer as a “top performer”;(5) comparisons with peers within the Company; and (6) expectations forcontributions toward increasing shareholder value.  The ECG Committee approves any grants afterconsideration of the CEO recommendations, its members’ knowledge of marketpractice, our actual performance for the current fiscal year and expectationsof our future performance.  We do notmake decisions regarding stock-based awards based on the gains or losses fromprior equity awards.  In addition, we donot require our named executive officers to own the Company’s commonstock.  Generally, stock-based awardsgranted to the named executive officers vest over a three-year period with thefirst vesting period ending on the first anniversary of the date of grant.

 

Asof June 30, 2009, the Company had three active stock-based compensationplans under which warrants and options (collectively referred to as “awards”)had been granted to employees, directors and other non-employees. As ofJune 30, 2009, the Company had options and warrants outstanding whichwere, or may have been, exercisable for 1,008,770 shares of common stock. Thevast majority of these options and all of the warrants were “out of the money”as of the consummation date of the Restructuring (i.e., the agreed-upon pricefor which the option/warrant holder may purchase the Company’s common stockexceeded the current fair value of the common stock).  In connection with the Restructuring, the Companyterminated its three existing stock-based compensation plans and paidapproximately $0.2 million of cash settlements to holders of options andwarrants in exchange for their agreement to cancel and terminate such optionsand warrants.

 

Aspreviously approved by the stockholders in connection with the Restructuring,in January 2010, Holdings’ Board of Directors authorized the creation of theMXenergy Holdings Inc. 2010 Stock Incentive Plan, pursuant to which the Companymay issue Class C Common Stock not to exceed 10% of Holdings’ outstandingcommon stock (on a fully diluted basis) after giving effect to theRestructuring.  Also in January 2010,Holdings’ Board of Directors approved grants of RSUs to certain seniorexecutive officers, directors and a former director, pursuant to which theCompany may issue approximately 2.9 million shares of Class C Common Stock,representing 5% of Holdings’ outstanding common stock (on a fully dilutedbasis), subject to prescribed vesting requirements.  Refer to Notes 2 and 19 of the consolidatedfinancial statements included in Item 8 of this Annual Report for additionalinformation regarding RSUs granted

 

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duringfiscal year 2010.  In connection with theRestructuring, the Company’s bondholders authorized grants of RSUs in fiscalyear 2010, rather than stock options as in prior years, principally because itis now widely recognized that RSUs are generally preferable because they moredirectly align the interests of award recipients with those of stockholders.

 

**OtherCompensation**

 

Allof our executive officers are eligible for benefits generally offered to allemployees, including, but not limited to; life, health, disability and dentalinsurance and participation in our 401(k) plan.  We intend to continue to maintain our currentbenefits for our executive officers, as well as for all of our employees.  The ECG Committee may, in its sole discretionrevise, amend or add to the named executive officer’s benefits and perquisitesif deemed advisable. We do not believe it is necessary for the attraction orretention of management talent to provide the officers with a substantialamount of compensation in the form of perquisites.  During fiscal year 2010, in addition tomatching the 401(k) contributions of all of the named executive officers,we made reimbursement payments to Messrs. Mayer and Blake and to Ms.Goldberg for professional association and club membership fees.

 

Additionally,our executive officers may be awarded special compensation, at the solediscretion of the ECG Committee, in recognition of extraordinary initiative orefforts related to purchase acquisitions or other transactions.  In September 2009, the Company paidapproximately $0.8 million of bonuses to its executive officers and certainother employees related to consummation of the Restructuring, of which thefollowing amounts were paid to named executive officers:  Mr. Mayer: $240,000; Mr. Parikh: $240,000;Mr. Blake: $15,000; Mr. Werner: $25,000; and Ms. Artman-Hodge: $30,000.  The Compensation Committee of the Board ofDirectors that existed prior to the creation of the current ECG Committeedetermined these bonus amounts, at its sole discretion, after seeking the CEO’srecommendation with respect to executive officers other than himself.

 

**Accountingand Tax Considerations**

 

Inaccordance with U.S. GAAP, the estimated fair value of RSUs granted, net offorfeitures expected to occur, is amortized as compensation expense over thevesting period of the RSUs based on the accelerated attribution method.  For additional information, see Notes 2and 19 of our audited consolidated financial statements included elsewhereherein.

 

Generally,the granting of RSUs does not trigger any recognition of income or gain to theholder.  When the holder receivesunrestricted shares (either at vesting or a later date selected in a deferredcompensation election, if allowed), the fair market value of the unrestrictedshares will be ordinary income to the recipient, and we will receive acorresponding tax deduction.

 

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**SummaryCompensation Table**

 

Annualcompensation for the named executive officers is summarized in the followingtable.

 
| **Name and Principal  Position** | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus  (1)** | ** ** | **Stock  Awards  (2)** | ** ** | **Option  Awards  (3)** | ** ** | **Non-  equity  Incentive  Plan****(4)** | ** ** | **All Other  (5)** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|----------|------------|------------|------------|----------------|------------|------------------------|------------|-------------------------|------------|------------------------------------------|------------|-------------------------|------------|-----------|------------|
|                                       |       |     |       |       |       |           |       |                   |       |                    |       |                                     |       |                    |       |      |       |
| **Jeffrey Mayer**                          |       | 2010     |       | $          | 594,825    |           | $          | 240,000                |       | $                       | 2,955,341  |                                     | $          | —                  |       | $         | 481,256    |   | $ | 45,280 |   | $ | 4,316,702 |   |
| *President and Chief*                      |       | 2009     |       | 594,825    |       | —         |       | —                 |       | —                  |       | 519,240                                  |       | 53,859                  |       | 1,167,924 |       |
| *Executive Officer*                        |       | 2008     |       | 566,183    |       | —         |       | 475,950                |       | —                  |       | 236,115                                  |       | 366,564                 |       | 1,644,812 |       |
|                                       |       |     |       |       |       |           |       |                   |       |                    |       |                                     |       |                    |       |      |       |
| **Chaitu Parikh**                          |       | 2010     |       | 425,366    |       | 240,000        |       | 2,452,305              |       | —                  |       | 449,178                                  |       | 994,460                 |       | 4,561,309 |       |
| *Executive Vice President*                 |       | 2009     |       | 421,785    |       | —         |       | —                 |       | —                  |       | 403,768                                  |       | 16,936                  |       | 842,489   |       |
| *and Chief Financial Officer*              |       | 2008     |       | 401,475    |       | —         |       | —                 |       | —                  |       | 202,859                                  |       | 16,189                  |       | 620,523   |       |
|                                       |       |     |       |       |       |           |       |                   |       |                    |       |                                     |       |                    |       |      |       |
| **Robert Blake**                           |       | 2010     |       | 225,000    |       | 15,000         |       | 251,519                |       | —                  |       | 179,407                                  |       | 50,994                  |       | 721,920   |       |
| *Senior Vice President,*                   |       | 2009     |       | —     |       | —         |       | —                 |       | —                  |       | —                                   |       | —                  |       | —    |       |
| *Regulatory Affairs*                       |       | 2008     |       | —     |       | —         |       | —                 |       | —                  |       | —                                   |       | —                  |       | —    |       |
| * *                                   |       |     |       |       |       |           |       |                   |       |                    |       |                                     |       |                    |       |      |       |
| **Gina Goldberg**                          |       | 2010     |       | 281,865    |       | —         |       | 251,519                |       | —                  |       | 309,210                                  |       | 28,336                  |       | 870,930   |       |
| *Senior Vice President,*                   |       | 2009     |       | 281,865    |       | —         |       | —                 |       | —                  |       | 158,408                                  |       | 15,739                  |       | 456,012   |       |
| *Marketing*                                |       | 2008     |       | 244,963    |       | —         |       | —                 |       | —                  |       | 117,574                                  |       | 12,255                  |       | 374,792   |       |
|                                       |       |     |       |       |       |           |       |                   |       |                    |       |                                     |       |                    |       |      |       |
| **Robert Werner**                          |       | 2010     |       | 293,561    |       | 25,000         |       | 251,519                |       | —                  |       | 405,971                                  |       | 32,871                  |       | 1,008,922 |       |
| *Senior Vice President,*                   |       | 2009     |       | 250,000    |       | —         |       | —                 |       | —                  |       | 99,750                                   |       | 19,731                  |       | 369,481   |       |
| *Supply*                                   |       | 2008     |       | 250,000    |       | —         |       | —                 |       | —                  |       | 47,050                                   |       | —                  |       | 297,050   |       |
|                                       |       |     |       |       |       |           |       |                   |       |                    |       |                                     |       |                    |       |      |       |
| **Carole R. Artman-Hodge**(6)              |       | 2010     |       | 342,000    |       | 30,000         |       | —                 |       | —                  |       | 11,923                                   |       | 1,364,717               |       | 1,748,640 |       |
| *Executive Vice President*                 |       | 2009     |       | 390,000    |       | —         |       | —                 |       | —                  |       | 207,032                                  |       | 20,962                  |       | 617,994   |       |
| * *                                   |       | 2008     |       | 390,000    |       | —         |       | 475,950                |       | —                  |       | 180,925                                  |       | 390,086                 |       | 1,436,961 |       |
|                                            |            |          |            |            |            |                |            |                        |            |                         |            |                                          |            |                         |            |           |            |  |  |  |  |  |  |  |

 

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(1)  For fiscal year2010, includes bonuses related to consummation of the Restructuring.

(2)  For fiscal year 2010,includes the aggregate grant date fair value of RSUs granted in January 2010.  Refer to Notes 2 and 19 of the consolidatedfinancial statements included in Item 8 of this Annual Report for informationregarding these grants, including the assumptions used to calculate the grantdate fair value.

(3)  There were no stock option awards granted to any of the named executiveofficers during fiscal year 2010.

(4)  Includes: (i) annual incentive-based compensation awards accrued bythe Company for the fiscal years noted; and (ii) adjustments to prior yearawards that were paid during the fiscal years noted.  Amounts reflected are exclusively cashawards.

(5)  Forfiscal year 2010, amounts include: (i) contributions to theCompany-sponsored employee savings plan under Section 401(k) of theCode (Mr. Mayer: $22,000; Mr. Parikh: $16,500; Mr. Blake:$19,904; Ms. Goldberg: $20,916; Mr. Werner: $20,423; andMs. Artman-Hodge: $21,762); (ii) club membership and professionalassociation fees (Mr. Mayer: $12,480); (iii) reimbursement of legalexpenses in connection with preparation of employment agreements (Mr. Werner:$7,448); (iv) compensation paid in connection with severance agreements:(Ms. Artman-Hodge: $1,330,500);  (v) compensationpaid in connection with relocation agreements: (Mr. Parikh: $966,140); and(vi) settlement payments resulting from termination of stock-basedcompensation plans in connection with the Restructuring (Mr. Mayer:$10,800; Mr. Parikh: $11,820; Mr. Blake: $31,090; Ms. Goldberg:$7,420; Mr. Werner: $5,000; and Ms. Artman-Hodge: $12,455).

(6)  Effective May 14, 2010,Ms. Artman-Hodge was no longer employed by the Company.

 

**2010 Grants of Plan-Based Awards**

 

InJanuary 2010, Holdings’ Board of Directors approved grants of RSUs to certainsenior officers, pursuant to which the Company may issue shares of Class C CommonStock, subject to prescribed vesting requirements.  Informationwith respect to incentive-based compensation awards for fiscal year 2010, inaccordance with the employment agreements executed with the named executiveofficers, are summarized in the following table.  Refer to Note 19 of the consolidatedfinancial statements included in Item 8 of this Annual Report for additionalinformation regarding RSUs granted during fiscal year 2010.

 

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| ** **                 | ** ** | **Estimated Future Payouts Under  Incentive Plan Awards (1)** | ** ** | **All Other  Stock  Awards:  Number  of Shares** | ** ** | **Grant  Date Fair  Value of  Stock** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Name**                   | ** ** | **Threshold**                                                                               | ** ** | **Target**                                                 | ** ** | **Maximum**                                     | ** ** | **of Stock (2)** | ** ** | **Awards (2)** | ** ** |
|                       |       |                                                                                        |       |                                                       |       |                                            |       |   |   |   |   |
| Jeffrey Mayer              |       | $                                                                                           | 0          |                                                       | $          | 594,825                                         |       | $ | 713,790 |   | 1,343,337 |   | $ | 2,955,341 |   |
| Chaitu Parikh              |       | 0                                                                                           |       | 450,000                                                    |       | 540,000                                         |       | 1,114,684 |   | 2,452,305 |   |
| Robert Blake               |       | 0                                                                                           |       | 112,500                                                    |       | 225,000                                         |       | 114,327 |   | 251,519 |   |
| Gina Goldberg              |       | 0                                                                                           |       | 140,933                                                    |       | 281,865                                         |       | 114,327 |   | 251,519 |   |
| Robert Werner              |       | 0                                                                                           |       | 300,000                                                    |       | 450,000                                         |       | 114,327 |   | 251,519 |   |
| Carole R. Artman-Hodge (3) |       | —                                                                                      |       | —                                                     |       | —                                          |       | — |   | — |   |
|                            |            |                                                                                             |            |                                                            |            |                                                 |            |  |  |  |  |  |  |  |  |

 

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(1)   Amounts reflect the range of potentialshort-term incentive payouts under the Company’s incentive compensationprogram.  If a named executive officer’sIPF and/or the Company’s BPF exceed targets for any fiscal year, the ECGCommittee may, at its discretion, approve incentive plan awards that exceed themaximum amounts noted in the table. Actual payouts to named executive officers for fiscal year 2010performance, as well as the business objectives and percentage of targetachieved, are disclosed above under “Annual Incentive-Based Compensation.”

(2)   Includes the aggregate grantdate fair value of RSUs granted in January 2010.  Refer to Notes 2 and 19 of the consolidatedfinancial statements included in Item 8 of this Annual Report for informationregarding these grants, including the assumptions used to calculate the grantdate fair value.

(3)   Effective May 14, 2010,Ms. Artman-Hodge, the Company’s former EVP, was no longer employed by theCompany.

 

**OutstandingEquity Awards at June 30, 2010**

 

InSeptember 2009, in connection with the Restructuring, we terminated ourthree existing stock-based compensation plans and offered cash settlements toholders of options and warrants in exchange for their agreement to cancel andterminate such options and warrants. Total cash settlement amounts were approximately $0.2 million.  As a result, all options and warrants thatwere outstanding as of June 30, 2009 were cancelled and terminated inconnection with the Restructuring.  Therewere no options or warrants exercised by named executive officers during thefiscal year ended June 30, 2010. The Company did not award any options or warrants under stock-basedcompensation plans during the fiscal year ended June 30, 2010, but insteadawarded RSUs.

 

**OptionsExercised and Stock Vested**

 

Duringfiscal year 2010, none of the named executive officers acquired any shares ofany class of common stock from exercise of options or from vesting of RSUs.

 

**PensionBenefits**

 

Wedo not provide any post-retirement pension benefits to any of our namedexecutive officers.

 

**NonqualifiedDeferred Compensation Plans**

 

Wedo not provide any nonqualified deferred compensation programs for any of ournamed executive officers.

 

**Agreementswith Named Executive Officers**

 

***Jeffrey Mayer Employment Agreement***

 

OnFebruary 13, 2008, we entered into a new employment agreement withMr. Mayer (the “Mayer Agreement”). The Mayer Agreement replaces a previous employment agreement datedApril 1, 1999.  The materialdifferences in the Mayer Agreement include the following:  (i) reducing both the initial andautomatic renewal terms of the agreement; (ii) providing increasedseverance upon a termination without business reasons (and including theconcept of a constructive termination); (iii) providing for severance upona change in control in connection with a qualifying termination; and(iv) including a Code Section 280G provision, which provides foreither a reduction of payments or a tax gross-up.  In each case, we included these revised termsto reflect market practices.

 

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Theinitial term of the Mayer Agreement is four years and is automatically renewedfor successive one-year terms unless either party gives the other 180 days’notice that the Mayer Agreement will not be extended or if the Mayer Agreementis otherwise terminated.  Pursuant to theMayer Agreement, Mr. Mayer’s office will be located in our headquarters inStamford, Connecticut, and he will report to our Board of Directors.  In addition to his position as CEO, we agreeto use our best efforts to ensure that Mr. Mayer will continue to serve asa member of the Board of Directors.

 

Pursuantto the Mayer Agreement, Mr. Mayer will receive an annual base salary of$566,500 as of the effective date of the Mayer Agreement, which may be increasedfrom time to time by the ECG Committee, at its discretion.  In addition, Mr. Mayer’s annual targetbonus shall be equal to 100% of his then current base salary, 75% of which ispayable based on achievement of Company and/or individual objectives specifiedby the ECG Committee and 25% of which may be awarded solely at the discretionof the ECG Committee.  In addition, theECG Committee may, in its sole discretion, award Mr. Mayer an additionalbonus of up to 20% of his base salary then in effect for extraordinaryperformance in connection with a “significant business event,” as defined inthe Mayer Agreement.

 

Inthe event that Mr. Mayer is terminated involuntarily and without “businessreasons” (as such term is defined in the Mayer Agreement, which generallyincludes “cause” events such as felony conviction, fraud or insubordination) ora “constructive termination” (as such term is defined in the Mayer Agreement,such as a material reduction in salary or authority or an attempt to relocate Mr. Mayerwithout his approval) occurs, Mr. Mayer will be entitled to receive(i) his then current base salary, any paid time off and any earned andunpaid target bonus accrued through the date of termination; (ii) a lumpsum payment equal to the greater of (a) his then current base salary for aperiod of twelve months following the date of termination, or (b) his thencurrent base salary for the remainder of the then current employment term; and(iii) a lump sum payment equal to (a) 100% of the target bonus forthe fiscal year in which the date of termination occurs, (b) 100% of thetarget bonus for any full fiscal year remaining during the then applicableemployment term, and (c) a pro rata portion of 100% of the target bonusbeing paid for the final fiscal year that begins during the then applicableemployment term.  In addition, all ofMr. Mayer’s unvested stock options, restricted stock, and other equityawards shall become fully vested and all stock options that are vested andoutstanding (but unexercised) on the date of termination will be cancelled andwe will pay to Mr. Mayer, with respect to each option, an amount equal tothe excess of the fair market value per share of the shares underlying suchoption over the exercise price of such option multiplied by the number ofshares underlying such option.  Inaddition, Mr. Mayer’s benefits and certain perquisites will continue forthe duration of the then current employment term.

 

Ifthere is a change in control (as such term is defined in the Mayer Agreement)and either a constructive termination occurs or we terminate Mr. Mayer’semployment without business reasons prior to the expiration of the then currentemployment term, Mr. Mayer will be entitled to receive (i) his thencurrent base salary, any paid time off, and any earned and unpaid target bonusaccrued through the date of termination; (ii) a lump sum payment equal tothe greater of (a) two times his then current base salary or (b) histhen current base salary for the remainder of the then current employment term;(iii) a lump sum payment equal to the greater of (a) 200% of thetarget bonus for the fiscal year in which the termination occurs, or(b) 100% of the target bonus for the fiscal year in which the terminationoccurs times the number of years for the remainder of the then currentemployment term.  In addition, all ofMr. Mayer’s unvested stock options, restricted stock, and other equityawards shall become fully vested.

 

IfMr. Mayer is terminated as a result of death or disability (as such termis defined in the Mayer Agreement), he or his representative, as the case maybe, is entitled to receive (i) any accrued and unpaid salary;(ii) any accrued and unpaid target bonus for the prior fiscal year;(iii) a pro rata portion of any target bonus that he would have otherwiseearned during the fiscal year in which the termination occurs; and(iv) any accrued and unpaid time off. Mr. Mayer’s outstanding stock options, restricted stock, and otherequity arrangements shall expire in accordance with the terms of the applicableaward agreements.

 

IfMr. Mayer voluntarily terminates his employment (other than in the case ofa constructive termination), or he is terminated involuntarily for businessreasons, he will be entitled to receive (i) all accrued and unpaid salary,all accrued and unpaid target bonus for the prior fiscal year, and a pro rataportion of any target bonus that he would have otherwise earned during thefiscal year in which such termination occurs and (ii) all accrued butunpaid time off and other benefits due to him through his termination dateunder any

 

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Company-providedor paid plans, policies, and arrangements. Mr. Mayer’s stock options, restricted stock, and other equityarrangements will cease vesting immediately and such awards will expire inaccordance with the terms of the applicable award agreements.

 

IfMr. Mayer’s employment is terminated for any reason, we have the initialright to purchase all (but not less than all) of the common stock of theCompany held by Mr. Mayer by making a written offer within 60 days oftermination.  If Mr. Mayer is involuntarilyterminated for any reason (including a constructive termination) other than forbusiness reasons, but we do not offer to purchase his shares of common stockwithin 60 days of termination, Mr. Mayer has the right to cause us torepurchase all (but not less than all) of his common stock.  The foregoing rights terminate upon aninitial public offering of our common stock.

 

TheMayer Agreement provides that in the event that Mr. Mayer becomes entitledto payments or benefits that would constitute an “excess parachute payment”within the meaning of Section 280G of the Code, the payment and/orbenefits will be reduced to the extent that such payments will not be subjectto the excise tax or any interest or penalties imposed by Section 4999 ofthe Code, referred to herein as the 280G Reduction. The 280G Reduction willonly take place if Mr. Mayer’s “net after tax benefit” (as defined in theMayer Agreement) exceeds the net after tax benefit he would realize if the 280GReduction were not made. To the extent, the 280G Reduction is unavailablebecause Mr. Mayer’s net after tax benefit would be greater if the 280GReduction were not made, we will pay Mr. Mayer a gross up payment in anamount such that after the payment by Mr. Mayer of all taxes (includingany income taxes, interest, penalties or any excise taxes), Mr. Mayerwould retain an amount of the gross-up payment equal to seventy-five (75%) ofany excise tax imposed upon the payments received by Mr. Mayer.

 

TheMayer Agreement also contains restrictive covenants, which apply for theremainder of the then-current agreement term. Pursuant to the restrictive covenants, Mr. Mayer is generallyprohibited from (1) owning or providing services for any businesscompeting against us for the remainder of the agreement term; (2) inducingemployees to leave our employ or hiring them (unless the employee contactsMr. Mayer on an unsolicited basis); (3) soliciting any of ourcustomers, suppliers, licensees or other business relations; or(4) disparaging us, our executive officers, or our directors.  In the event that Mr. Mayer violates theprovisions of the restrictive covenants, he will not be entitled to anyseverance benefits upon a termination without business reasons or upon aconstructive termination.  Additionally,upon any such violation, all of Mr. Mayer’s unexercised options, whethervested or unvested, shall be cancelled.

 

***Chaitu Parikh Employment Agreement***

 

OnMay 14, 2010, the Company entered into an amendment (the “Amendment”),effective as of May 17, 2010 (the “Effective Date”), to the employmentagreement effective February 13, 2008 with Mr. Parikh (the “ParikhAgreement”), the Company’s CFO. The Amendment (i) provides thatMr. Parikh shall be relocated from the Company’s headquarters in Stamford,Connecticut to Houston, Texas on a mutually agreeable date in 2010,(ii) extends the term of Mr. Parikh’s employment with the Company fora period of three years beginning on the Effective Date and(iii) increases Mr. Parikh’s annual base salary to $450,000. The Amendment also provides that if Mr. Parikh is terminated within theeighteen month period following the substantial completion of his relocation toHouston either (i) involuntarily and without Business Reasons or aConstructive Termination (as such terms are defined in the Parikh Agreement),or (ii) following a Change of Control (as such term is defined in theParikh Agreement), then he shall receive a relocation package with terms,conditions and dollar value substantially the same as those provided inconnection with his 2010 relocation to Houston in addition to any othercompensation to which he is entitled pursuant to his Employment Agreement.

 

Inaddition, on May 10, 2010, Mr. Parikh and the Company entered into arelocation agreement (the “Relocation Agreement”) pursuant to whichMr. Parikh agreed to relocate from Stamford, Connecticut to Houston,Texas.  The Relocation Agreement provides that the Company shall engage arelocation firm that will purchase Mr. Parikh’s residence for its fairmarket value, and pay Mr. Parikh an amount equal to the difference between$1,725,000 and the purchase price paid.  Pursuant to the terms of theRelocation Agreement, Mr. Parikh shall also be reimbursed by the Companyfor (i) all reasonable sales expenses related to his residence inConnecticut including, among other things, fees, taxes, attorneys’ fees,inspection and closing costs, (ii) reasonable expenses incurred inconnection with the purchase of a home in Houston including, among otherthings, temporary housing costs for up to six months, attorneys’ fees, inspection

 

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andclosing costs, and (iii) reasonable moving and travel costs incurredtherewith.  The Company shall “gross up” Mr. Parikh for any taxesowed as a result of any payments received pursuant to the terms of theRelocation Agreement.  Mr. Parikh shall also receive a lump sumpayment of $15,000.

 

TheParikh Agreement replaces a previous employment agreement datedNovember 1, 2002.  The materialdifferences in the Parikh Agreement include the following:  (i) providing for a specified term;(ii) providing increased severance upon a termination without businessreasons (and including the concept of a constructive termination), or upon achange in control in connection with a qualifying termination; and(iii) including a Code Section 280G provision, which provides foreither a reduction of payments or a tax gross-up.  In each case, we included these revised termsto reflect market practices, and Mr. Parikh’s increased responsibilitiesand authority.

 

Theinitial term of the Parikh Agreement is three years and is automaticallyrenewed for successive one-year terms unless either party gives the other 180days’ notice that the Parikh Agreement will not be extended or if the ParikhAgreement is otherwise terminated.

 

Pursuantto the Parikh Agreement, Mr. Parikh will receive an annual base salary of$401,700 as of the Effective Date, which may be increased from time to time bythe ECG Committee, at its discretion.  Inaddition, Mr. Parikh’s annual target bonus shall be equal to 100% of histhen current base salary, 75% of which is payable based on achievement ofCompany and/or individual objectives specified by the ECG Committee and 25% ofwhich may be awarded solely at the discretion of the ECG Committee.  In addition, the ECG Committee may, in itssole discretion, award Mr. Parikh an additional bonus of up to 20% of hisbase salary then in effect for extraordinary performance in connection with a “significantbusiness event,” as defined in the Parikh Agreement.

 

Inthe event that Mr. Parikh is terminated involuntarily and without “businessreasons” (as such term is defined in the Parikh Agreement, which generallyincludes “cause” events such as felony conviction, fraud or insubordination) ora “constructively termination” (as such term is defined in the ParikhAgreement, such as a material reduction in salary or authority or an attempt torelocate Mr. Parikh without his approval) occurs, Mr. Parikh will beentitled to receive (i) his then current base salary, any unpaid time offand any earned and unpaid target bonus accrued through the date of termination;(ii) a lump sum payment equal to the greater of (a) his then currentbase salary for a period of twelve months following the date of termination, or(b) his then current base salary for the remainder of the then currentemployment term; and (iii) a lump sum payment equal to (a) 100% ofthe target bonus for the fiscal year in which the date of termination occurs,(b) 100% of the target bonus for any full fiscal year remaining during thethen applicable employment term, and (c) a pro rata portion of 100% of thetarget bonus being paid for the final fiscal year that begins during the thenapplicable employment term.  In addition,all of Mr. Parikh’s unvested stock options, restricted stock, and otherequity awards shall become fully vested and all stock options that are vestedand outstanding (but unexercised) on the date of termination will be cancelledand we will pay to Mr. Parikh, with respect to each option, an amountequal to the excess of the fair market value per share of the shares underlyingsuch option over the exercise price of such option multiplied by the number ofshares underlying such option.  Inaddition, Mr. Parikh’s benefits will continue for the duration of the thencurrent employment term.

 

Ifthere is a change in control (as such term is defined in the employmentagreement) and either a constructive termination occurs or we terminateMr. Parikh’s employment without business reasons prior to the expirationof the then current employment term, he will be entitled to receive(i) his then current base salary, any paid time off, and any earned andunpaid target bonus accrued through the date of termination; (ii) a lumpsum payment equal to the greater of (a) two times his then current basesalary or (b) his then current base salary for the remainder of the thencurrent employment term; (iii) a lump sum payment equal to the greater of(a) 200% of the target bonus for the fiscal year in which the terminationoccurs, or (b) 100% of the target bonus for the fiscal year in which thetermination occurs times the number of years for the remainder of the then currentemployment term.  In addition, all ofMr. Parikh’s unvested stock options, restricted stock, and other equityawards shall become fully vested.

 

IfMr. Parikh is terminated as a result of death or disability (as such termis defined in the Parikh Agreement), he or his representative, as the case maybe, will be entitled to receive (i) any accrued and unpaid salary;(ii) any accrued and unpaid target bonus for a prior fiscal year; (iii) apro rata portion of any

 

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targetbonus that he would have otherwise earned during the fiscal year in which thetermination occurs; and (iv) any accrued and unpaid paid time off.  Mr. Parikh’s outstanding stock options,restricted stock, and other equity arrangements shall expire in accordance withthe terms of the applicable award agreements.

 

IfMr. Parikh voluntarily terminates his employment (other than in the caseof a constructive termination), or he is terminated involuntarily for businessreasons, he will be entitled to receive (i) all accrued and unpaid salary,all accrued and unpaid target bonus for a prior fiscal year, and a pro rataportion of any target bonus that he would have otherwise earned during thefiscal year in which such termination occurs and (ii) all accrued butunpaid paid time off and other benefits due to him through his termination dateunder any Company-provided or paid plans, policies, and arrangements.  Mr. Parikh’s stock options, restrictedstock, and other equity arrangements will cease vesting immediately and suchawards will expire in accordance with the terms of the applicable awardagreements.

 

IfMr. Parikh’s employment is terminated for any reason, we have the initialright to purchase all (but not less than all) of the common stock of theCompany held by Mr. Parikh by making a written offer within 60 days oftermination.  If Mr. Parikh isinvoluntarily terminated for any reason (including a constructive termination)other than for business reasons, but we do not offer to purchase his shares ofcommon stock of the Company within 60 days of termination, Mr. Parikh hasthe right to cause us to repurchase all (but not less than all) of his commonstock of the Company.  The foregoingrights terminate upon an initial public offering of our common stock.

 

TheParikh Agreement provides that in the event that Mr. Parikh becomesentitled to payments or benefits that would constitute an “excess parachutepayment” within the meaning of Section 280G of the Code, the paymentand/or benefits will be reduced to the extent that such payments will not besubject to the excise tax or any interest or penalties imposed bySection 4999 of the Code, referred to herein as the 280G Reduction. The280G Reduction will only take place if Mr. Parikh’s “net after tax benefit”(as defined in the Parikh Agreement) exceeds the net after tax benefit he wouldrealize if the 280G Reduction were not made. To the extent, the 280G Reductionis unavailable because Mr. Parikh’s net after tax benefit would be greaterif the 280G Reduction were not made, we will pay Mr. Parikh a gross uppayment in an amount such that after the payment by Mr. Parikh of alltaxes (including any income taxes, interest, penalties or any excise taxes),Mr. Parikh would retain an amount of the gross-up payment equal toseventy-five (75%) of any excise tax imposed upon the payments received byMr. Parikh.

 

TheParikh Agreement also contains restrictive covenants, which apply for theremainder of the then-current agreement term. Pursuant to the restrictive covenants, Mr. Parikh is generallyprohibited from (1) owning or providing services for any businesscompeting with us for the remainder of the agreement term; (2) inducingemployees to leave our employ or hiring them (unless the employee contactsMr. Parikh on an unsolicited basis); (3) soliciting any of ourcustomers, suppliers, licensees or other business relations; or(4) disparaging us, our executive officers, or our directors.  In the event that Mr. Parikh violatesthe provisions of the restrictive covenants, he will not be entitled to anyseverance benefits upon a termination without business reasons or upon aconstructive termination.  Additionally,upon any such violation, all of Mr. Parikh’s unexercised options, whethervested or unvested, shall be cancelled.

 

***Carole R. Artman-Hodge Employment Agreement***

 

EffectiveMay 14, 2010, Ms. Artman-Hodge, the Company’s EVP, was no longeremployed by the Company.  In connection with her departure, we paidMs. Artman-Hodge approximately $1.3 million, which includes a severancepayment described in her employment agreement with the Company, dated as ofApril 1, 1999, and a pro rated bonus for fiscal year 2010.

 

***Robert Blake Employment Agreement***

 

Weentered into an employment letter agreement with Mr. Blake dated March 21,2001 (the “Blake Agreement”) in connection with Mr. Blake’s employment asour Director of Customer Operations. Mr. Blake’s office will be located inthe Company’s Maryland offices.

 

TheBlake Agreement provides that Mr. Blake will receive an annual base salaryof $90,000 and will be eligible for a bonus, which may be paid from time totime to senior management of the Company, at the

 

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discretionof the Board of Directors.  Mr. Blakeis also entitled to participate in any future stock option plans and any otherequity based incentive plans as may be approved by the Board of Directors fromtime to time.

 

Inthe event that the Company terminates the Blake Agreement for “cause,” (as suchterm is defined in the Blake Agreement, which generally includes events such asfelony conviction, fraud or insubordination), the Company may terminate theBlake Agreement immediately and without advance notice to Mr. Blake, andthe Company will pay to Mr. Blake all compensation due for base salary andpaid time off for services performed to the date of termination, lessapplicable withholding taxes, plus any unreimbursed business expenses or otheramounts owing to Mr. Blake in accordance with Company policies.

 

Inthe event that the Company terminates the Blake Agreement without cause, theCompany will provide Mr. Blake with at least 30 days advance writtennotice.  In the event of suchtermination, the Company may set an earlier date for cessation of Mr. Blake’sduties, provided that the Company shall continue to pay Mr. Blake’s basesalary for a period of 30 days following receipt of the terminationnotice.  In addition, the Company willpay Mr. Blake, as severance, an amount equal to one month of his basesalary, as well as all compensation due for base salary and paid time off forservices performed to the date of termination, less applicable withholdingtaxes, plus any unreimbursed business expenses or other amounts owing to Mr. Blakein accordance with Company policies.

 

Inthe event of Mr. Blake’s death or disability, the Blake Agreement will beterminated immediately and the Company will pay to Mr. Blake allcompensation due for base salary and paid time off for services performed tothe date of termination, less applicable withholding taxes, plus any unreimbursedbusiness expenses or other amounts owing to Mr. Blake in accordance withCompany policies.  For the purposes ofthe Blake Agreement “disability” shall mean an illness, injury or conditionthat renders Mr. Blake incapable of performing his duties on a full-timebasis for a period of at least 3 months.

 

TheBlake Agreement also contains a non-compete provision, which applies during theterm of the Blake Agreement and for a period of one year following Mr. Blake’stermination for any reason.  Pursuant tothe non-compete provision, Mr. Blake is prohibited from: (1) directlyor indirectly soliciting business of the type performed by the Company from, orworking in any capacity for, any person or entity that was a client of theCompany or that was contacted as a client prospect by any representative of theCompany within ninety (90) days prior to such date of termination; (ii) solicitingor inducing any employee of the Company; or (iii) hiring or attempt tohire any such employee of the Company.

 

OnDecember 30, 2008, the Company entered into an amendment (the “BlakeAgreement Amendment”), effective as of January 1, 2009, to the BlakeAgreement.  The Blake Agreement Amendmentamended certain provisions of the Blake Agreement in order to reduce the riskof potential adverse tax consequences to Mr. Blake under Section 409Aof the Internal Revenue Code of 1986, as amended.

 

***Gina Goldberg Employment Agreement***

 

Weentered into an employment agreement with Ms. Goldberg dated June 13,2007, referred to herein as the Goldberg Agreement, in connection with Ms. Goldberg’semployment as our Vice President of Sales and Marketing. Under the GoldbergAgreement, the parties may terminate the Goldberg Agreement at any timeprovided either party gives the other at least 60 days’ advance notice oftermination. Ms. Goldberg will report to the Chief Operating Officer orthe Chief Executive Officer of the Company.

 

TheGoldberg Agreement provides that Ms. Goldberg will receive an annual basesalary of $238,000. The Goldberg Agreement also provides that Mr. Goldbergis eligible for a bonus, which is expected to range from 50 to 100% of Ms. Goldberg’sbase salary.

 

Becausethe Company had already granted warrants and options to Ms. Goldberg priorto June 13, 2007, the Goldberg Agreement provides that the terms of thewarrants and options would not be impacted by the Goldberg Agreement. If theCompany terminates Ms. Goldberg’s employment for business reasons (asdefined below) all unvested stock options will be forfeited.

 

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Additionally,if Ms. Goldberg’s employment is terminated for any reason, the Companyshall have the right to purchase all of the common stock owned by Ms. Goldberg,provided that if the amount payable to Ms. Goldberg exceeds $200,000, theCompany may pay the excess to Ms. Goldberg in quarterly installments with5% interest over a period of three years and the Company’s obligation to makesuch payment shall be suspended during any period that the payment would causethe Company to violate a loan or similar financial covenant.

 

Inthe event that the Company terminates Ms. Goldberg’s employment without a “businessreason” (as defined below) or Ms. Goldberg terminates her employment forany reason that constitutes a constructive termination (as defined below), Ms. Goldbergwill be entitled to (i) a lump sum payment equal to the greater of herbase salary for the remainder of the employment term or (ii) her basesalary for a period of 12 months. For purposes of severance, Ms. Goldberg’semployment term will be deemed to be two years. If the Company terminates Ms. Goldberg’semployment for business reasons or Ms. Goldberg terminates her employmentfor any reason that does not constitute a constructive termination, she will beentitled to any accrued and unpaid salary.

 

Forpurposes of the Goldberg Agreement, “business reasons” means: (i) grossnegligence, willful misconduct or other willful malfeasance in the performanceof her duties; (ii) conviction of, or plea of *nolocontendere* to, or written admission of the commission of a felony,or any other criminal offense involving moral turpitude; (iii) any act by Ms. Goldberginvolving moral turpitude, fraud or misrepresentation with respect to herduties for the Company or its affiliates; (iv) any act by Ms. Goldbergconstituting a failure to follow the directions of the Chief Executive Officer,the Chief Operating Officer, or the Board of Directors, provided written noticeof such failure is provided to Ms. Goldberg and the failure continues forfive days after receipt of such notice; and (v) subject to certainconditions, Ms. Goldberg’s material breach of the Goldberg Agreement thathas not been cured within 30 days after written notice of such breach by theBoard of Directors.

 

Forpurposes of the Goldberg Agreement, “constructive termination” occurs if Ms. Goldberggives the Company written notice of the existence of any of the following: (i) Ms. Goldbergis required to relocate her place of employment without her approval, otherthan a relocation that is within 30 miles of the Company’s Stamford offices; (ii) thereis an intentional and material reduction in Ms. Goldberg’s base salary(other than a reduction that is consistent with a general reduction for theexecutive staff as a group); (iii) there occurs any other material breachof the Goldberg Agreement by the Company provided Ms. Goldberg provides awritten demand for substantial performance to the Company. Constructivetermination will only be deemed to occur if the Company fails to cure the eventwithin 31 days following the date such notice is given.

 

TheGoldberg Agreement also contains a non-compete provision, which applies duringthe term of the Goldberg Agreement and, provided Ms. Goldberg has receiveda severance payment for a period of one year after she has received suchpayment. Pursuant to the non-compete provision, Ms. Goldberg is prohibitedfrom (1) inducing or attempting to induce any employee of the Company orsuch subsidiary (other than her own assistant) to leave the employ of theCompany, or in any way interfere with the relationship between the Company orany subsidiary and any employee thereof; (2) hiring or attempt to hire anemployee of the Company or any subsidiary at any time during the preceding 12months (unless the employee contacts Ms. Goldberg on an unsolicitedbasis); (3) directly or indirectly inducing or attempting to induce anycustomer, supplier, licensee or other business relation of the Company or (4) disparagingthe Company, its executive officers, or its directors.

 

***Robert Werner Employment Agreement***

 

Weentered into an employment agreement with Mr. Werner, effective April 1,2010 (the “Werner Agreement”), in connection with Mr. Werner’s employmentas our Vice President of Supply.  TheWerner Agreement replaces a previous employment agreement dated August 14,2006.  The term of the Werner Agreementis three years from its effective date.

 

Pursuantto the Werner Agreement, Mr. Werner will report to the CEO or, at thediscretion of the CEO, to someone serving as the Company’s Chief OperatingOfficer or Executive Vice President.  Mr. Werner’soffice will be located in the Company’s Houston offices.

 

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TheWerner Agreement provides that Mr. Werner will receive an annual basesalary of $300,000, which was paid retroactively to August 13, 2009.   Mr. Werner is also entitled to receiveother employee benefits provided to executive employees of the Companygenerally from time to time, including health, life insurance, disability,retirement, welfare, vacation, sick leave, holidays and sabbatical, so long as Mr. Werneris eligible for such benefits in accordance with the terms of such plans andwith the policies of the Company.

 

Mr. Wernerwill be eligible for a bonus, which may be paid from time to time to seniormanagement of the Company, at the discretion of the Board of Directors.  Mr. Werner’s target bonus shall be 100%of his base salary for performance that the Board of Directors determines to besatisfactory.  If performance goals areexceeded, Mr. Werner’s annual bonus may exceed the target bonus, providedhowever that in no event shall the annual bonus exceed 150% of his base salary.

 

TheWerner Agreement also entitles Mr. Werner to participate, on the samebasis as other similarly situated employees of the Company, in any future stockoption plans and any other equity based incentive plans as may be approved bythe Board of Directors from time to time.

 

Inthe event of Mr. Werner’s resignation or death, or if the Companyterminates the Werner Agreement for “business reasons” (as such term is definedin the Werner Agreement, which generally includes “cause” events such as felonyconviction, fraud or insubordination), the Company may terminate the WernerAgreement immediately and without advance notice to Mr. Werner, and theCompany will pay to Mr. Werner: (i) all compensation due for basesalary and paid time off for services performed to the date of termination; (ii) anyunreimbursed business expenses; and (iii) any other amounts due to Mr. Wernerunder any Company-provided or paid plans, policies or arrangements.

 

Inthe event that the Company terminates the Werner Agreement without businessreasons, or if Mr. Werner terminates his employment as a result of a “constructivetermination,” (as such term is defined in the Werner Agreement, such as amaterial reduction in salary or authority or a relocation), then within thirty(30) days of such termination date, the Company shall pay Mr. Werner: (i) allcompensation due for base salary and paid time off for services performed tothe date of termination; (ii) any unreimbursed business expenses; (iii) anyother amounts due to Mr. Werner under any Company-provided or paid plans,policies or arrangements; and (iv) any accrued and unpaid annual bonus fora previous fiscal year.  In addition,subject to certain requirements stipulated in the Werner Agreement, the Companyshall pay to Mr. Werner a lump sum equal to: (i) the amount of hisbase salary for the greater of twelve (12) months or the remainder of the termof the Werner Agreement; and (ii) the amount of Mr. Werner’s targetbonus.

 

Ifthere is a change in control (as such term is defined in the Werner Agreement)and either: (i) a constructive termination occurs; (ii) the Companyterminates Mr. Werner’s employment without business reasons within twelve(12) months following the change in control; or (iii) the Company electsnot to extend the Werner Agreement for a renewal term within the twelve (12)months that follow the change in control, then, subject to certain requirementsstipulated in the Werner Agreement, he will be entitled to receive a lump sumequal to his base salary.

 

TheWerner Agreement provides that in the event that Mr. Werner becomesentitled to payments or benefits that would constitute an “excess parachute payment”within the meaning of Section 280G of the Code, the payment and/orbenefits will be reduced to the extent that such payments will not be subjectto the excise tax or any interest or penalties imposed by Section 4999 ofthe Code, referred to herein as the 280G Reduction.  The 280G Reduction will only take place ifMr. Werner’s “net after tax benefit” (as defined in the Parikh Agreement)exceeds the net after tax benefit he would realize if the 280G Reduction werenot made.  To the extent the 280G Reductionis unavailable because Mr. Werner’s net after tax benefit would be greaterif the 280G Reduction were not made, we will pay Mr. Werner a gross uppayment in an amount such that after the payment by Mr. Werner of alltaxes (including any income taxes, interest, penalties or any excise taxes),Mr. Werner would retain an amount of the gross-up payment equal toseventy-five (75%) of any excise tax imposed upon the payments received byMr. Werner.  The Werner Agreementalso includes a Code Section 409A provision to reduce the risk ofpotential adverse tax consequences to Mr. Werner.

 

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TheWerner Agreement also contains non-compete provisions, which apply during theterm of the Werner Agreement and, if a severance payment is made by the Companyto Mr. Werner, for a period of one year following Mr. Werner’s terminationfor any reason.  Pursuant to thenon-compete provision, Mr. Werner is prohibited from: (i) directly orindirectly owning, managing, controlling, participating in, consulting with,rendering certain specified services for, or in any manner engaging in anbusiness that competes with the Company or its subsidiaries; (ii) solicitingor inducing any employee of the Company; (iii) hiring or attempting tohire any such employee of the Company; (iv) directly or indirectlyinducing or attempting to induce any customer, supplier, licensee or otherbusiness relation of the Company or its subsidiaries to cease doing businesswith the Company or such subsidiary or in any way interfering with therelationship between any such customer, supplier, licensee or business relationand the Company or any subsidiary; and (v) disparaging the Company, itsexecutive officers or its directors.

 

**Post-EmploymentPayments**

 

Thefollowing table summarizes the payments that we would have been required tomake to the named executive officers as of June 30, 2010 as a result oftheir termination, retirement, disability or death or a change in control ofthe Company as of that date.  Thespecific circumstances identified in the table that would trigger such paymentsare described in the employment agreement for each executive.

 
| ** **                  | ** ** | **Termination Event**                                                  | ** ** |
|-----------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **Involuntary  Without Cause  or For  Constructive  Termination** | ** ** | **Involuntary  With Cause or  Without  Constructive  Termination** | ** ** | **Change in  Control** | ** ** | **Disability** | ** ** | **Death** | ** ** |
|                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Jeffrey Mayer:**          |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash severance payment      |       | $                                                                           | 2,984,975  |   | $ | 460,635 |   | $ | 2,390,150 |   | $ | 460,635 |   | $ | 460,635 |   |
| Health and life insurance   |       | 22,999                                                                      |       | — |   | — |   | — |   | — |   |
| Continuation of perquisites |       | 36,000                                                                      |       | — |   | — |   | — |   | — |   |
| Total termination benefits  |       | $                                                                           | 3,043,974  |   | $ | 460,635 |   | $ | 2,390,150 |   | $ | 460,635 |   | $ | 460,635 |   |
|                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Chaitu Parikh:**          |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash severance payment      |       | $                                                                           | 3,499,649  |   | $ | 458,142 |   | $ | 3,049,649 |   | $ | 458,142 |   | $ | 458,142 |   |
| Health and life insurance   |       | 40,832                                                                      |       | — |   | — |   | — |   | — |   |
| Total termination benefits  |       | $                                                                           | 3,540,481  |   | $ | 458,142 |   | $ | 3,049,649 |   | $ | 458,142 |   | $ | 458,142 |   |
|                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Robert Blake:**           |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash severance payment      |       | $                                                                           | 223,013    |   | $ | 185,513 |   | $ | 223,013 |   | $ | 185,513 |   | $ | 185,513 |   |
| Total termination benefits  |       | $                                                                           | 223,013    |   | $ | 185,513 |   | $ | 223,013 |   | $ | 185,513 |   | $ | 185,513 |   |
|                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Gina Goldberg:**          |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash severance payment      |       | $                                                                           | 600,456    |   | $ | 318,591 |   | $ | 318,591 |   | $ | 318,591 |   | $ | 318,591 |   |
| Total Termination benefits  |       | $                                                                           | 600,456    |   | $ | 318,591 |   | $ | 318,591 |   | $ | 318,591 |   | $ | 318,591 |   |
|                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Robert Werner:**          |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash severance payment      |       | $                                                                           | 1,238,891  |   | $ | 12,864 |   | $ | 712,864 |   | $ | 12,864 |   | $ | 12,864 |   |
| Total Termination benefits  |       | $                                                                           | 1,238,891  |   | $ | 12,864 |   | $ | 712,864 |   | $ | 12,864 |   | $ | 12,864 |   |

 

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**DirectorCompensation**

 

Thefollowing table provides summary compensation information for each non-employeedirector during the fiscal year ended June 30, 2010:

 
| **Name**                              | ** ** | **Fees  Earned  or Paid  in Cash** | ** ** | **Stock  Awards  (3)** | ** ** | **Option  Awards** | ** ** | **Total**  | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|------------------------|------------|--------------------|------------|------------|------------|
| ** **                            | ** ** | ** **                                   | ** ** | ** **             | ** ** | ** **         | ** ** | ** ** | ** ** |
| Mark Bernstein                        |       | $                                            | 82,000     |                   | $          | 25,000             |       | $          | —     |   | $ | 107,000 |   |
| Denham Commodity Partners Fund LP (1) |       | 37,500                                       |       | 12,500                 |       | —             |       | 50,000     |       |
| Carl Adam Carte (1)                   |       | 24,500                                       |       | 12,500                 |       | —             |       | 37,000     |       |
| James N. Chapman                      |       | 92,250                                       |       | 25,000                 |       | —             |       | 117,250    |       |
| Michael J. Hamilton                   |       | 103,000                                      |       | 50,000                 |       | —             |       | 153,000    |       |
| Charter Mx LLC (2)                    |       | 73,000                                       |       | 25,000                 |       | —             |       | 98,000     |       |
| Randal T. Maffett                     |       | 83,750                                       |       | 25,000                 |       | —             |       | 108,750    |       |
| RBS Sempra (2)                        |       | 66,500                                       |       | 25,000                 |       | —             |       | 91,500     |       |
| Jonathan Moore                        |       | 69,000                                       |       | 25,000                 |       | —             |       | 94,000     |       |
|                                       |            |                                              |            |                        |            |                    |            |            |            |  |  |  |  |

 

----

(1)   Prior to May 2011, aformer director, who was also an executive officer of Denham, was appointed torepresent Denhamon Holdings’ Board of Directors and all committee and attendance feesassociated with the activities of the former director were paid directly toDenham.  Effective in May 2010, Mr. Cartebecame the appointed director to represent Denham.  Because Mr. Carte is considered to beindependent of Denham, all committee and attendance fees associated with Mr. Carte’sactivites are paid directly to him.

(2)   Mr. Landuyt and Ms. Mitchellare the appointed directors to represent Charter Mx LLC and RBS Sempra,respectively on Holdings’ Board of Directors. Committee and attendance fees associated with the activities of Mr. Landuytand Ms. Mitchell are paid directly to those entities.

(3)   The aggregate number of RSUsoutstanding for directors at June 30, 2010 were as follows: 5,102 RSUseach for Messrs. Bernstein, Carte, Chapman, Maffett, and Moore; 5,102 RSUseach for Charter Mx LLC and RBS Sempra; and 10,204 RSUs for Mr. Hamilton.

 

Effectiveas of January 1, 2010, pursuant to an amendment to the certificate ofincorporation, the Company will pay each independent director a retainer of$50,000 per year, a retainer of $10,000 per year for serving on the Executive,Compensation and Governance Committee, a retainer of $10,000 per year forserving on the Risk Oversight Committee and a retainer of $12,000 per year forserving on the Audit Committee.  Thechairman of each of the Executive, Compensation and Governance Committee andthe Risk Oversight Committee will receive an additional retainer of $5,000 peryear, and the chairman of the Audit Committee will receive an additionalretainer of $3,000 per year.  TheChairman of the Board of Directors, if he or she is an independent director,will receive an additional retainer of $25,000 per year.  In addition, the Company will issue equitysecurities to directors, pursuant to a management equity plan, as follows: (i) eachindependent director will receive equity securities with a value of $25,000 peryear; and (ii) the Chairman of the Board of Directors, if the Chairman isan independent director, will receive an additional annual issuance of equitysecurities with a value of $25,000 per year. The Company also will pay each independent director $2,000 forattendance in person at each regular or special board meeting or committeemeeting and $500 for attendance by telephone at each regular or special boardor committee meeting.

 

InJanuary 2010, Holdings’ directors were granted RSUs, pursuant to which wemay issue shares of Class C Common Stock, subject to prescribed vestingrequirements.  Refer to Notes 2 and 19 ofthe consolidated financial statements included in Item 8 of this Annual Reportfor additional information regarding RSUs granted during fiscal year 2010.  During fiscal year 2010, we did not grant anynon-equity incentive compensation or other deferred compensation to any of ourdirectors.  We do not provide any definedbenefit or defined contribution plan benefits to any of our directors.

 

**CompensationCommittee and ECG Committee Interlocks and Insider Participation**

 

Messrs. Chapman(Chair), Bernstein, Hamilton and Landuyt and Ms. Mitchell serve on the ECGCommittee as of July 27, 2010.  Noneof these directors has a material relationship with the Company or has acurrent or prior relationship with the Company, or is a holder of shares ofcommon stock or is a

 

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memberof management of the Company that might cause such director to act other thanin an entirely independent manner with respect to all issues that come beforethe Board of Directors.  The Board ofDirectors has determined that Ms. Mitchell is not an independent directoras a result of her affiliation with RBS Sempra, a significant stockholder ofthe Company and the lender and counterparty under the Commodity SupplyFacility.

 

Duringfiscal year 2010, we had no Compensation Committee or ECG Committee “interlocks,”meaning that no executive officer of the Company served as a director or memberof the Compensation Committee of another entity of which an executive officerserved as a director or a member of the Compensation Committee of the Company.

 

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** **

**ITEM 12.  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 

Thefollowing table sets forth, as of August 31, 2010, information withrespect to shares of common stock beneficially owned by: (1) each of thenamed executive officers; (2) each director; (3) all executiveofficers and directors as a group; and (4) each person known to be thebeneficial owner of more than five percent of our outstanding shares of commonstock.

 

Thepercentages of common stock and beneficially owned are reported on the basis ofSEC regulations governing the determination of beneficial ownership ofsecurities.  Under the rules of theSEC, a person is deemed to be a “beneficial owner” of a security if that personhas or shares “voting power,” which includes the power to vote or to direct thevoting of such security, or “investment power,” which includes the power todispose of or to direct the disposition of such security.  A person is also deemed to be a beneficialowner of any securities for which that person has a right to acquire beneficialownership within 60 days.  Allpersons listed have sole voting and investment power with respect to theirshares (subject to community property laws where applicable) unless otherwiseindicated.

 

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| ** **                                                                                                                                                                        | ** ** | **Common Stock (1)**                        | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **Total  Number  of Shares  Beneficially ** | ** ** | **Percentage of  Beneficially Owned Common Stock** | ** ** |
| **Name or Description**                                                                                                                                                 | ** ** | **Owned**                                             | ** ** | **Class A** | ** ** | **Class B** | ** ** | **Class C** | ** ** | **Total** | ** ** |
|                                                                                                                                                                              |       |                                                  |       |   |   |   |   |   |   |   |   |
| **Executive Officers and Directors:**                                                                                                                                             |       |                                                  |       |   |   |   |   |   |   |   |   |
| Jeffrey  Mayer (2)                                                                                                                                                                |       | 1,308,609                                             |       | 0.8 | % | — | % | 6.0 | % | 2.4 | % |
| Chaitu  Parikh (3)                                                                                                                                                                |       | 649,869                                               |       | 0.8 |   | — |   | 2.2 |   | 1.2 |   |
| Robert  Blake (4)                                                                                                                                                                 |       | 39,070                                                |       | — |   | — |   | 0.2 |   | 0.1 |   |
| Gina  Goldberg (5)                                                                                                                                                                |       | 38,885                                                |       | — |   | — |   | 0.2 |   | 0.1 |   |
| Robert  Werner (6)                                                                                                                                                                |       | 38,109                                                |       | — |   | — |   | 0.2 |   | 0.1 |   |
| Mark  Bernstein (7)                                                                                                                                                               |       | 10,204                                                |       | — |   | — |   | — |   | — |   |
| Carl  Adam Carte (8)                                                                                                                                                              |       | 5,102                                                 |       | — |   | — |   | — |   | — |   |
| James  N. Chapman (7)                                                                                                                                                             |       | 10,204                                                |       | — |   | — |   | — |   | — |   |
| Michael  J. Hamilton (9)                                                                                                                                                          |       | 20,408                                                |       | — |   | — |   | — |   | — |   |
| William  Landuyt (10)                                                                                                                                                             |       | 10,014,909                                            |       | — |   | — |   | 57.5 |   | 18.2 |   |
| Randal  T. Maffett (7)                                                                                                                                                            |       | 10,204                                                |       | — |   | — |   | — |   | — |   |
| Jacqueline  Mitchell                                                                                                                                                              |       | —                                                |       | — |   | — |   | — |   | — |   |
| Jonathan  Moore (7)                                                                                                                                                               |       | 10,204                                                |       | — |   | — |   | — |   | — |   |
| All  directors and executive officers as a group (13 persons) (11)                                                                                                           |       | 12,169,729                                            |       | 1.5 |   | — |   | 66.9 |   | 22.1 |   |
|                                                                                                                                                                              |       |                                                  |       |   |   |   |   |   |   |   |   |
| **5% Stockholders:**                                                                                                                                                              |       |                                                  |       |   |   |   |   |   |   |   |   |
| Charter  Mx LLC (10)  1105 Market Street, Suite 1300, Wilmington, DE 19899                                                                                                   |       | 10,014,909                                            |       | — |   | — |   | 57.5 |   | 18.2 |   |
|                                                                                                                                                                              |       |                                                  |       |   |   |   |   |   |   |   |   |
| Camulos  Capital LP (12)   Three Landmark Square, Stamford, CT 06901                                                                                                              |       | 6,476,179                                             |       | 19.2 |   | — |   | — |   | 11.7 |   |
|                                                                                                                                                                              |       |                                                  |       |   |   |   |   |   |   |   |   |
| Denham  Commodity Partners Fund LP (13)  200 Clarendon Street, 25th Floor, Boston, MA 02116                                                                                       |       | 8,437,630                                             |       | 18.3 |   | — |   | 13.0 |   | 15.3 |   |
|                                                                                                                                                                              |       |                                                  |       |   |   |   |   |   |   |   |   |
| Rose  Point Partners LLC (14)  50 Rose Brook Road, New Canaan, CT 06840                                                                                                           |       | 4,274,570                                             |       | 12.7 |   | — |   | — |   | 7.8 |   |
|                                                                                                                                                                              |       |                                                  |       |   |   |   |   |   |   |   |   |
| Sempra  Energy Trading LLC (15)   600 Washington Blvd., Stamford, CT 06901                                                                                                        |       | 4,012,494                                             |       | — |   | 100.0 |   | 0.1 |   | 7.3 |   |
|                                                                                                                                                                              |       |                                                  |       |   |   |   |   |   |   |   |   |
| Morgan  Stanley & Co. on behalf of certain funds and accounts, as holders  (16)   2000 Westchester Avenue, Purchase, NY 10577                                            |       | 3,756,228                                             |       | 11.1 |   | — |   | — |   | 6.8 |   |
|                                                                                                                                                                              |       |                                                  |       |   |   |   |   |   |   |   |   |
| Deutsche  Bank Securities, Inc. and affiliated entities (17)  60 Wall Street, 35th Floor, New York, NY 10005                                                            |       | 3,420,000                                             |       | 10.1 |   | — |   | — |   | 6.2 |   |
|                                                                                                                                                                              |       |                                                  |       |   |   |   |   |   |   |   |   |
| AIG  Asset Management Group on behalf of certain funds and accounts, as holders  (18)  2929 Allen Parkway, A37, Houston, TX 77019                                                 |       | 3,111,126                                             |       | 9.2 |   | — |   | — |   | 5.6 |   |
|                                                                                                                                                                              |       |                                                  |       |   |   |   |   |   |   |   |   |
| Whippoorwill  Associates, Inc., including shares voted on behalf of certain funds and  accounts, as holders (19)  11 Martine Avenue, 11th Floor, White Plains, NY 10606 |       | 2,500,000                                             |       | 7.4 |   | — |   | — |   | 4.5 |   |
|                                                                                                                                                                              |       |                                                  |       |   |   |   |   |   |   |   |   |
| Greenhill  Capital Partners, L.P. and its affiliated funds(20)  300 Park Avenue, 23rd floor, New York, NY 10022                                                              |       | 1,923,979                                             |       | — |   | — |   | 11.0 |   | 3.5 |   |

 

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| (1) |   | The total number of shares  beneficially owned includes the following outstanding shares of Holdings’  common stock as of August 31, 2010: 33,710,902 shares of Class A  Common Stock; 4,002,290 shares of Class B Common Stock; 16,438,669  shares of Class C Common Stock; and an aggregate total of 54,151,861  shares of common stock. The total number of shares beneficially owned also  includes an aggregate total of 978,231 shares of Class C Common Stock  expected to be issued within |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 60 days subsequent to  August 31, 2010 in connection with outstanding awards of RSUs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (2)    |   | Includes:  (1) 258,339 shares of Class A Common Stock and 31,538 shares of  Class C Common Stock issued and outstanding as of August 31, 2010;  (2) 570,953 shares of Class C Common Stock issued to Pequot  Enterprises LLC, a limited liability company owned 23% by Mr. Mayer and  for which Mr. Mayer, as manager, has both voting and dispositive power;  and (3) 447,779 shares of Class C Common Stock expected to be  issued on September 22, 2010 in connection with outstanding awards of  RSUs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (3)    |   | Includes:  (1) 258,339 shares of Class A Common Stock and 19,969 shares of  Class C Common Stock issued and outstanding as of August 31, 2010;  and (2) 371,561 shares of Class C Common Stock expected to be  issued on September 22, 2010 in connection with outstanding awards of  RSUs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (4)    |   | Includes:  (1) 961 shares of Class C Common Stock issued and outstanding as of  August 31, 2010; and (2) 38,109 shares of Class C Common Stock  expected to be issued on September 22, 2010 in connection with  outstanding awards of RSUs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (5)    |   | Includes:  (1) 776 shares of Class C Common Stock issued and outstanding as of  August 31, 2010; and (2) 38,109 shares of Class C Common Stock  expected to be issued on September 22, 2010 in connection with  outstanding awards of RSUs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (6)    |   | Includes  38,109 shares of Class C Common Stock expected to be issued on  September 22, 2010 in connection with outstanding awards of RSUs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (7)    |   | Includes:  (1) 7,653 shares of Class C Common Stock issued and outstanding as  of August 31, 2010; and (2) 2,551 shares of Class C Common  Stock expected to be issued on October 1, 2010 in connection with  outstanding awards of RSUs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (8)    |   | Includes:  (1) 2,551 shares of Class C Common Stock issued and outstanding as  of August 31, 2010; and (2) 2,551 shares of Class C Common Stock  expected to be issued on October 1, 2010 in connection with outstanding  awards of RSUs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (9)    |   | Includes:  (1) 15,306 shares of Class C Common Stock issued and outstanding as  of August 31, 2010; and (2) 5,102 shares of Class C Common  Stock expected to be issued on October 1, 2010 in connection with  outstanding awards of RSUs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (10)   |   | Includes:  (1) 10,012,358 shares of Class C Common Stock issued and  outstanding as of August 31, 2010; and (2) 2,551 shares of  Class C Common Stock expected to be issued on October 1, 2010 in  connection with outstanding awards of RSUs.   All of the shares of Class C Common Stock are held, or will be  held, by Charter Mx LLC. Charter Mx LLC is wholly-owned by Charterhouse  Equity Partners IV, L.P. The general partner of Charterhouse Equity Partners  IV, L.P. is CHUSA Equity Investors IV, L.P., whose general partner is  Charterhouse Equity IV, LLC, a wholly owned subsidiary of Charterhouse  Group, Inc. As a result of the foregoing, all of the shares held by  Charter Mx LLC would be deemed to be beneficially owned by Charterhouse  Group, Inc. We have been advised by Charterhouse Group, Inc. that  all decisions regarding investments by Charterhouse Equity Partners IV, L.P.  (the “Fund”) are made by an investment committee whose composition may change.  No individual has authority to make any such decisions without the approval  of the Fund’s investment committee. William Landuyt is an executive officer  of Charterhouse Group, Inc. and a member of the Fund’s investment  committee, the members of which, including Mr. Landuyt, each disclaim  beneficial ownership of the shares held by Charter Mx LLC except to the  extent of his or her pecuniary interest therein. |
| (11)   |   | Represents  beneficial ownership as a group for all directors and executive officers  listed in the table under “Directors, Executive Officers and Corporate  Governance—Directors and Executive Officers.” Includes: (1) 516,678  shares of Class A Common Stock and 10,682,473 shares of Class C  Common Stock issued and outstanding as of August 31, 2010; and  (2) 970,578 shares of Class C Common Stock expected to be issued  within 60 days subsequent to August 31, 2010 in connection with  outstanding awards of RSUs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (12)   |   | Includes  6,476,179 shares of Class A Common Stock issued and outstanding as of  August 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (13)   |   | Includes:  (1) 6,166,712 shares of Class A Common Stock and 2,268,367 shares  of Class C Common Stock issued and outstanding as of August 31,  2010; and (2) 2,551 shares of Class C Common Stock expected to be  issued on October 1, 2010 in connection with outstanding awards of RSUs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (14)   |   | Includes  4,274,570 shares of Class A Common Stock issued and outstanding as of  August 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (15)   |   | Includes:  (1) 4,002,290 shares of Class B Common Stock and 7,653 shares of  Class C Common Stock issued and outstanding as of August 31, 2010;  and (2) 2,551 shares of Class C Common Stock expected to be issued  on October 1, 2010 in connection with outstanding awards of RSUs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (16)   |   | Includes  3,756,228 shares of Class A Common Stock issued and outstanding as of  August 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (17)   |   | Includes  3,420,000 shares of Class A Common Stock issued and outstanding as of  August 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (18)   |   | Includes  3,111,126 shares of Class A Common Stock issued and outstanding as of  August 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (19)   |   | Includes:  (1) 1,619,962 shares of Class A Common Stock issued and outstanding  as of August 31, 2010 held by entities affiliated with Whippoorwill  Associates, Inc.; and (2) and 880,038 shares of Class A Common  Stock issued and outstanding as of August 31, 2010 held by certain funds  and accounts, as holders, over which Whippoorwill Associates, Inc.  exercises voting control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (20)   |   | Includes  1,923,979 shares of Class C Common Stock issued and outstanding as of  August 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

Equitycompensation plan information is summarized in the following table.

 
| **Plan Category**                                      | ** ** | **Number of  Securities to be  Issued Upon  Exercise of  Outstanding  Options,  Warrants and  Rights** | ** ** | **Weighted-  Average  Exercise Price  of Outstanding  Options  Warrants and  Rights** | ** ** | **Number of  Securities  Remaining  Available for  Future  Issuance under  Equity  Compensation  Plans** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                                                                                                           | ** ** | ** **                                                                                           | ** ** | ** **                                                                                                              | ** ** |
| Equity compensation plans approved by security  holders     |       | —                                                                                                                               |       | —                                                                                               |       | 3,175,738                                                                                                               |       |
| Equity compensation plans not approved by security  holders |       | —                                                                                                                               |       | —                                                                                               |       | —                                                                                                                  |       |
| Total                                                       |       | —                                                                                                                               |       | —                                                                                               |       | 3,175,738                                                                                                               |       |

 

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**ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

OurCode of Ethics, which is posted on our website at www.mxholdings.com, prohibitsdirectors and executive officers from engaging in transactions on behalf of theCompany with a family member, or with a company with which they or any familymember are a significant owner or associated or employed in a significantrole.  Our Audit Committee must reviewand approve in advance all related party transactions or business orprofessional relationships.  Allinstances involving potential related party transactions or business orprofessional relationships must be reported to the Company’s in-houselegal counsel, who is responsible to assess the materiality of the transactionor relationship and elevate the matter to the Audit Committee as appropriate.

 

**StockholdersAgreement**

 

OnSeptember 22, 2009, in connection with the consummation of ourRestructuring, we entered into a new stockholders agreement, which we amendedas of July 27, 2010 (the “Stockholders Agreement”).  Pursuant to the Stockholders Agreement,holders of Class A Common Stock are not subject to any restrictions on thetransfer of their shares while holders of Class B Common Stock and certainholders of Class C Common Stock are subject to certain restrictions.  Moreover, transfers of all shares ofClass C Common Stock are subject to a right of first refusal in favor ofthe holders of shares of Class A Common Stock and holders of shares ofClass B Common Stock.  No shares ofCommon Stock may be transferred to competitors of the Company or in any transactionthat, among other things, violates or causes a default, “change in control” orsimilar event under any of the Company’s or any of its subsidiaries’ materialdebt agreements, indentures and other agreements or instruments evidencingmaterial indebtedness of the Company or any of its subsidiaries (with certainexceptions), violates applicable securities laws or certain other laws, orresults in certain other specified consequences, unless such transaction hasbeen approved by (i) a majority of the authorized Class A directors(the “Class A Directors”), (ii) a majority of all authorized directors and(iii) in the case of certain specified actions, for so long as holders ofshares of Class B Common Stock have the exclusive right to nominate andelect the Class B director (the “Class B Director”), the Class BDirector.

 

Allshares of common stock will have preemptive rights, subject to certainexceptions, and information rights.  If aparty that did not acquire shares of common stock on September 22, 2009 (a“New Shareholder”) acquires, together with its affiliates, or proposes toacquire, from any person (such person, a “Selling Shareholder”), whetherthrough one or a series of transactions, such number of shares of common stockas would result in the New Shareholder (together with its affiliates) holding amajority of the then-issued and outstanding shares of common stock, then suchNew Shareholder, prior to consummating the proposed acquisition, must make amandatory offer (a “Mandatory Offer”) to purchase the remaining shares ofcommon stock that it does not own at a price equal to the higher of(a) the highest price per share paid by the New Shareholder and itsaffiliates for any shares of common stock acquired by the New Shareholder andits affiliates during the preceding nine months and (b) the purchase priceper share to be paid by the New Shareholder to the Selling Shareholder for theshares of common stock to be acquired by the New Shareholder from the SellingShareholder.

 

Customarytag-along rights are provided to all shareholders under the StockholdersAgreement with respect to sales of shares of common stock representing in theaggregate a majority of the then-issued and outstanding shares of all classesof common stock, on a fully diluted basis, to a single purchaser, or group ofrelated purchasers, in any transaction or series of related transactions,including where the conditions of a tag-along transfer are satisfied as aresult of a Mandatory Offer, subject to certain exceptions.

 

Customarydrag-along rights are provided under the Stockholders Agreement if holders ofshares representing at least 75% of all classes of common stock and holders ofshares representing at least 70% of the Class B Common Stock (until sharesof Class B Common Stock are converted into shares of Class C CommonStock or Class D Common Stock in connection with an IPO) determine to sellall of the shares of common stock to a person or persons (other than a personthat (i) has among its shareholders, members, partners or other equityholders, holders of common stock that collectively hold more than 20% of theoutstanding shares of common stock, or any affiliates of such holders, or(ii) is more than 20% owned or controlled, directly or indirectly, byholders of common stock, and other than an affiliate of any of the 

 

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sellingstockholders or a group including one or more affiliates of any of the sellingstockholders) in any transaction, or series of related transactions, that isproposed to be effected on an arms-length basis.  The Company will havethe right (but not the obligation) to purchase all (but not less than all) ofthe shares of Class A Common Stock or Class C Common Stock held byany holder who has not executed the Stockholders Agreement and who fails tosell its shares of Common Stock to the purchaser in a drag-along transactionfollowing a valid exercise of the drag-along rights contained in theStockholders Agreement.

 

Thefollowing matters require approval of (a) holders of at least 70% of theissued and outstanding shares of Class A Common Stock, (b) holders ofat least 70% of the issued and outstanding shares of Class B Common Stock(provided, with respect to clause (ii) below only, that such amendmentaffects the rights of holders of the Class B Common Stock or increases thenumber of authorized shares of Class B Common Stock), (c) in the caseof clause (ii) below only, and solely to the extent that such amendment affectsthe rights of the Class C Common Stock or increases the number ofauthorized shares of Class C Common Stock, holders of at least 70% of theissued and outstanding shares of Class C Common Stock, and(d) holders of at least 75% of all issued and outstanding shares of commonstock:

 
| (i)   |   | commencement  of a voluntary liquidation, winding up or dissolution of the Company or any  of its subsidiaries, filing of any petition in bankruptcy or insolvency or  entering into any arrangement for the benefit of creditors, commencing any  other proceeding for the reorganization, recapitalization or adjustment or  marshalling of the assets or liabilities of the Company or any of its  subsidiaries, or the adoption by the Company or any of its subsidiaries of a  plan with respect to any of the foregoing, or acquiescence or agreement by  the Company or any of its subsidiaries to any of the foregoing commenced or  petitioned for on an involuntary basis; |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  |   | amendment  or modification of the certificate of incorporation or the bylaws of the  Company or any subsidiary of the Company;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (iii) |   | reorganization  of the Company or reclassification of any of its securities; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (iv)  |   | waiver  of preemptive rights in connection with a strategic investment in the Company  by any person.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

Inaddition to any vote by holders of common stock required under Delaware law, avote of holders of at least 70% of the issued and outstanding shares ofClass A Common Stock and holders of at least 70% of the issued andoutstanding shares of Class B Common Stock (in the case of theClass B Common Stock, until shares of Class B Common Stock areconverted into shares of Class C Common Stock or shares of Class DCommon Stock or unless the contemplated merger or other transaction would, as acondition to the consummation thereof, result in, and does result in, the fullpay-off and termination of the Commodity Supply Facility) is required toapprove any merger, consolidation or other business combination involving theCompany or any of its subsidiaries (other than mergers of wholly ownedsubsidiaries of the Company with each other or the Company) or any transactionhaving the effect (economic or otherwise) of a sale of all or substantially allof the assets of the Company or any of its subsidiaries (other than transfersof assets of wholly owned subsidiaries of the Company to each other or theCompany).

 

Pursuantto the Stockholders Agreement, the Board of Directors consists of ninedirectors, elected as follows:

 

·                  Holders of the Class ACommon Stock are entitled to nominate five Class A Directors, at least twoof whom shall be independent and qualify as a “financial expert.”

·                  Holders of the Class BCommon Stock are entitled to nominate and elect one Class B Director untilthe shares of Class B Common Stock have been converted and are no longeroutstanding.  At such time as the shares of Class B Common Stock havebeen converted and are no longer outstanding, the Class B Directorposition will be filled by the vote of a plurality of all holders of CommonStock voting as a single class at any meeting of the stockholders of theCompany at which the Class B Director would otherwise have been permittedto be elected, or as otherwise permitted under the Bylaws, and the Class BDirector will be required to be independent and qualify as a “financial expert.”

·                  Holders of the Class CCommon Stock are entitled to nominate and elect two Class C Directors.

·                  The ninth Director will bethe Company’s president and chief executive officer, who initially, shall beJeffrey A. Mayer.

 

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Followingthe conversion of the shares of Class A Common Stock, Class B CommonStock (if applicable) and Class C Common Stock into shares of Class DCommon Stock in connection with an IPO, the Board of Directors will consist ofsuch number of directors as will be determined by the Board of Directors fromtime to time, which number will not be less than seven (7) nor more thanfifteen (15) directors, and directors will be elected by holders of shares ofcommon stock, voting as a single class at any meeting of the stockholders ofthe Company at which directors are permitted to be elected, or as otherwisepermitted under the Bylaws, provided, however, that, for so long as the sharesof Class B Common Stock are outstanding and have not been converted intoshares of Class C Common Stock or into shares of Class D CommonStock, the Board of Directors will include one director nominated and electedby holders of shares of Class B Common Stock.

 

Inorder to conduct meetings of the Board of Directors, a quorum requires thepresence of (i) a majority of the directors then in office, and(ii) prior to the conversion of shares of Class A Common Stock,Class B Common Stock (if applicable) and Class C Common Stock intoshares of Class D Common Stock, (A) a majority of the Class ADirectors then in office, (B) the Class B Director and (C) aClass C Director, provided, however, that if a meeting for which noticehas been duly given or waived in accordance with the Bylaws is adjourned due tothe failure of either the Class B Director or a Class C Director tobe in attendance, then so long as notice is duly delivered of the time andplace of the reconvened meeting in accordance with the Bylaws, the presence ofeither the Class B Director or a Class C Director at the reconvenedmeeting will not be required to establish quorum.

 

**Class AVoting Agreement and Class C Voting Agreement**

 

Inaddition, on September 22, 2009, holders of Class A Common Stockentered into a Class A Voting Agreement (the “Class A VotingAgreement”) that governs their rights to nominate and elect the Class A Directorsand certain related matters and holders of Class C Common Stock enteredinto a Class C Voting Agreement (the “Class C Voting Agreement”) thatgoverns their rights to nominate and elect the Class C Directors andcertain related matters.  The Class AVoting Agreement also provides that so long as AIG Global Investment Corp., asthe investment advisor (or any asset management entity successor thereto) forcertain entities that will hold shares of Class A Common Stock (“AIG”),Camulos Capital LP, as the investment manager for certain entities that willhold shares of Class A Common Stock (“Camulos”), and/or Taconic CapitalAdvisors LP (“Taconic”), as the investment manager for certain entities thatwill hold shares of Class A Common Stock, hold at least 35% of theClass A Common Stock held by it on September 22, 2009 (after givingeffect to stock splits or combinations or similar events), such stockholder(each a “Designating Stockholder” and, collectively, the “DesignatingStockholders”) shall be entitled to designate one of the Class A Directors. The fourth and fifth Class A Directors will be designated by theDesignating Stockholders by mutual agreement and will be independent andqualify as “financial experts.”  If anyDesignating Stockholder loses its right to designate a Class A Director,thereafter the stockholders that retain the designation right will, by mutualagreement, designate the Class A Director and such Class A Directorposition will be elected by a plurality vote of the shares of Class ACommon Stock.  As of April 7, 2010,Taconic no longer held 35% of the Class A Common Stock held by it on September 22,2009, and accordingly, it no longer has the right to designate a Class ADirector.

 

TheClass C Voting Agreement provides that one of the Class C Directorsshall be designated by Charterhouse so long as Charterhouse holds at least 35%of the outstanding shares of Class C Common Stock held by it on September 22,2009 (after giving effect to stock splits or combinations or similar events),and the other Class C Director shall be designated by Denham so long asDenham holds at least 35% of the outstanding shares of Class C CommonStock held by it on September 22, 2009 (after giving effect to stocksplits or combinations or similar events).  If either Charterhouse orDenham loses its right to designate a Class C Director, thereafter suchClass C Director position will be elected by a plurality vote of theshares of Class C Common Stock.

 

**DenhamCredit Facility**

 

Denhamis a significant stockholder of the Company. Stuart Porter, a principal of Denham Capital Management LP and ChiefInvestment Officer for Denham, was a director of Holdings until May 13,2010.  As of June 30, 2009, theCompany had borrowed the entire $12.0 million available line under the DenhamCredit Facility, which bore interest at 9% per annum.  In connection with 

 

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theRestructuring, the entire outstandingbalance under the Denham Credit Facility was repaid, including accrued andunpaid interest, and the facility was terminated on September 22, 2009.

 

**LegalServices**

 

DanielBergstein, a former director of Holdings and a current stockholder of theCompany, is senior counsel to Paul, Hastings, Janofsky & Walker LLP, alaw firm that provides legal services to the Company.  Paul Hastings provides the Company withgeneral legal services, including legal services associated with theRestructuring and amendments to the Revolving Credit Facility and HedgeFacility.  Paul Hastings is expected tocontinue to provide legal services to the Company in future periods.

 

**FinancialAdvisory Services**

 

Priorto the consummation of the Restructuring, the Company had a financial advisory servicesagreement with Greenhill & Co., LLC (“Greenhill”), an affiliate ofGreenhill Capital Partners, a significant stockholder of the Company (the “GreenhillAgreement”).  Under the GreenhillAgreement, Greenhill provided advisory services in connection with liquidityoptions considered during the Restructuring. The Greenhill Agreement was terminated effective September 22,2009.

 

**ManagementFees**

 

Asof June 30, 2009, the Company had agreed to pay Denham, Charter Mx LLC, asignificant stockholder of the Company, and Daniel Bergstein an aggregateannual fee of $0.9 million, payable in equal quarterly amounts, for managementconsulting services provided to the Company. Following the Restructuring, the Company terminated its agreements withDenham, Charter Mx LLC and Mr. Bergstein.

 

EffectiveSeptember 23, 2009, the Company’s Board of Directors approved anarrangement under which Mr. Bergstein will be paid annual fees of $50,000for management consulting services provided to the Company.  In addition, the Company granted RSUs toMr. Bergstein in January 2010, which will vest ratably fromJanuary 15, 2010 through October 1, 2010.

 

**OriginalNotes Held by Holders of Class A Common Stock and Class C CommonStock**

 

Inconnection with the Restructuring, Denham, Camulos Capital LP, Mr. Mayer, Mr. Parikhand Ms. Artman-Hodge, Holdings’ former EVP, all of whom were issued sharesof Class C Common Stock, also acquired 6,476,733 shares, 2,066,715 shares,258,339 shares, 258,339 shares and 103,336 shares, respectively, of Class ACommon Stock and Original Notes in the aggregate amount of $6.3 million, $2.0million, $0.3 million, $0.3 million and $0.1 million, respectively.

 

**Independenceof Directors**

 

Asof July 27, 2010, the Board of Directors has determined that each of Messrs. Bernstein,Carte, Chapman, Hamilton, Landuyt, Maffett and Moore has no materialrelationship with the Company and has no current or prior relationship with theCompany, any holder of shares of any class of common stock or any member ofmanagement of the Company that might cause such director to act other than inan entirely independent manner with respect to all issues that come before theBoard of Directors, and accordingly, each is independent.  Mr. Mayeris not deemed to be independent because the Company currently employshim.   Ms. Mitchell is not anindependent director as a result of her affiliation with RBS Sempra, asignificant stockholder of the Company and the lender and counterparty underthe Commodity Supply Facility.

 

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**ITEM14.  PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

Thetotal fees and expenses for professional services provided by our independentregistered public accounting firm, Ernst & Young LLP are presented inthe table below:

 
| ** ** | ** ** | **Year ended June 30,** | ** ** |
|------------|------------|----------------------------------------|------------|
| ** ** | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** ** | ** ** | **(in thousands)**                | ** ** |
|       |       |                                   |       |   |   |
| Audit fees | ** ** | **$**                                  | **1,481**  |   | $ | 1,500 |   |
| Tax fees   | ** ** | **173**                                |       | 57 |   |
| Total      | ** ** | **$**                                  | **1,654**  |   | $ | 1,557 |   |

 

AuditFees consist primarily of: (1) fees billed for the audit of theconsolidated financial statements and review of other financial informationincluded in our Annual Report on Form 10-K for fiscal years 2009 and 2008;(2) reviews of our Quarterly Reports on Form 10-Q; (3) review ofour compliance with new U.S. GAAP pronouncements, including SEC regulations;(4) review our accounting and reporting methodology for certain specifictransactions; and (5) review of our financial and other records andissuance of a comfort letter associated with the exchange of bonds thatoccurred pursuant to the Restructuring.

 

TaxFees consist of fees for tax compliance, tax advice and tax planning.

 

TheAudit Committee has the responsibility to consider the compatibility ofnon-audit services provided by its independent auditors with maintaining theauditors’ independence.  There were nosuch non-audit services performed by the independent registered publicaccounting firm during the fiscal year ended June 30, 2010.

 

**Pre-Approval Policy**

 

Theservices performed by the independent registered public accounting firm duringthe fiscal year ended June 30, 2010 were pre-approved by the AuditCommittee, in accordance with the Audit Committee’s independent registeredpublic accounting firm pre-approval policy. This policy describes the permitted audit, audit-related and taxservices (collectively, referred to as the disclosure categories) that theindependent registered public accounting firm may perform up to a pre-determineddollar limit per project. The policy requires a description of the materialservices (referred to as the standard services list) expected to be performedby the independent registered public accounting firm in each of the disclosurecategories presented to the audit committee for approval.

 

Anyrequests for audit, audit-related and tax services not contemplated on thestandard services list or exceeding the pre-determined dollar limit per projectmust be submitted to the Audit Committee for specific pre-approval and cannotcommence until such approval has been granted. Normally, pre-approval is provided on an informal, as-needed basis.  The Audit Committee may delegate pre-approvalauthority to one of its members, who shall initially be the chairman of theAudit Committee.  The decisions of anyAudit Committee member to whom pre-approval authority is delegated must bepresented to the full Audit Committee at its next scheduled meeting.

 

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**PART IV**

 

**ITEM15.  EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

 

Thefollowing documents are filed as part of this Annual Report:

 
| (1) |   | Financial  Statements. See Index to Financial Statements under “Item 8. Financial  Statements and Supplementary Data.”                                                                                                                                      |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Financial  Statement Schedules. Schedules are omitted as the required information is  inapplicable or the information is presented in the consolidated financial  statements or related notes under “Item 8. Financial Statements and  Supplementary Data.” |
| (3) |   | Exhibits.  The exhibits filed as part of this Annual Report are listed in the exhibit  index immediately preceding such exhibits. Such index is incorporated herein  by reference.                                                                                    |

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                           |     | MXENERGY  HOLDINGS INC. |
|--------------------------------|----------|------------------------------|
|                           |     |                         |   |
| Date:  September 28, 2010 |     | By:                          | /s/ JEFFREY A. MAYER |   |
|                           |     |                         | Jeffrey A. Mayer |   |
| * *                       | * * | * *                     | President and Chief Executive Officer |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

** **
| **Signatures**          | ** ** | **Title**                                             | ** ** | **Date**                 |
|-------------------------|------------|-------------------------------------------------------|------------|--------------------------|
|                    |       |                                                  |       |                     |
| /s/ JEFFREY A. MAYER    |       | Director,  President and Chief Executive Officer      |       | September 28,  2010 |
| Jeffrey A. Mayer        |       | (Principal  Executive Officer)                        |       |                     |
|                    |       |                                                  |       |                     |
| /s/ CHAITU PARIKH       |       | Executive  Vice President and Chief Financial Officer |       | September 28,  2010 |
| Chaitu Parikh           |       | (Principal  Financial Officer)                        |       |                     |
|                    |       |                                                  |       |                     |
| /s/ RONNIE V. SHIELDS   |       | Vice  President and Controller                        |       | September 28,  2010 |
| Ronnie V. Shields       |       | (Principal  Accounting Officer)                       |       |                     |
|                    |       |                                                  |       |                     |
| /s/ MARK BERNSTEIN      |       | Director                                              |       | September 28,  2010 |
| Mark Bernstein          |       |                                                  |       |                     |
|                    |       |                                                  |       |                     |
| /s/ CARL ADAM CARTE     |       | Director                                              |       | September 28,  2010 |
| Carl Adam Carte         |       |                                                  |       |                     |
|                    |       |                                                  |       |                     |
| /s/ JAMES CHAPMAN       |       | Director                                              |       | September 28,  2010 |
| James Chapman           |       |                                                  |       |                     |
|                    |       |                                                  |       |                     |
| /s/ MICHAEL J. HAMILTON |       | Director                                              |       | September 28,  2010 |
| Michael J. Hamilton     |       |                                                  |       |                     |
|                    |       |                                                  |       |                     |
| /s/ WILLIAM LANDUYT     |       | Director                                              |       | September 28,  2010 |
| William Landuyt         |       |                                                  |       |                     |
|                    |       |                                                  |       |                     |
| /s/ RANDAL T. MAFFETT   |       | Director                                              |       | September 28,  2010 |
| Randal T. Maffett       |       |                                                  |       |                     |
|                    |       |                                                  |       |                     |
| /s/ JACQUELINE MITCHELL |       | Director                                              |       | September 28,  2010 |
| Jacqueline Mitchell     |       |                                                  |       |                     |
|                    |       |                                                  |       |                     |
| /s/ JONATHAN MOORE      |       | Director                                              |       | September 28,  2010 |
| Jonathan Moore          |       |                                                  |       |                     |

 

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**Index to Exhibits**

 
| **Exhibit  Number** | ** ** | **Title**                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Third Amended and Restated Certificate of Incorporation of MXenergy  Holdings Inc. (25)                                                                                                                                                                                                                                                                                                                                                                             |
| 3.13                |       | Fourth Amended and Restated Bylaws of MXenergy Holdings Inc. (25)                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.1                 |       | Indenture, dated as of August 4, 2006, by and among MXenergy  Holdings Inc., Law Debenture Trust Company of New York, as trustee, and  Deutsche Bank Trust Company Americas, as registrar and paying agent, related  to MXenergy’s Floating Rate Senior Notes due 2011 (1)                                                                                                                                                                                |
| 4.2                 |       | Supplemental Indenture, dated as of August 1, 2007, by and  among MXenergy Holdings Inc., Law Debenture Trust Company of New York, as  trustee, and Deutsche Bank Trust Company Americas, as registrar and paying  agent, related to MXenergy’s Floating Rate Senior Notes due 2011 (3)                                                                                                                                                                   |
| 4.3                 |       | Second Supplemental Indenture, dated as of September 22, 2009,  by and among MXenergy Holdings Inc., the subsidiary guarantors party thereto  and Law Debenture Trust Company of New York, as trustee, related to  MXenergy’s Floating Rate Senior Notes due 2011 (19)                                                                                                                                                                                    |
| 4.4                 |       | Form of Senior Floating Rate Note due 2011 (included in  Exhibit 4.1) (1)                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.5                 |       | Registration Rights Agreement, dated as of August 4, 2006, by  and among MXenergy Holdings Inc., the guarantors named therein and Deutsche  Bank Securities Inc. and Morgan Stanley & Co. Incorporated, as  initial purchasers (1)                                                                                                                                                                                                                    |
| 4.6                 |       | Registration Rights Agreement dated as of June 25, 2004, by  and among MXenergy Inc., Denham Commodity Partners Fund LP (formerly known as  Sowood Commodity Partners Fund LP) (as successor to Lathi LLC), Charter Mx  LLC, Greenhill Capital Partners, L.P., Greenhill Capital Partners (Cayman),  L.P., Greenhill Capital Partners (Executives), L.P., Greenhill Capital, L.P.,  Jeffrey A. Mayer, Carole R. Artman-Hodge and Daniel P. Burke, Sr. (1) |
| 4.7                 |       | Indenture, dated as of September 22, 2009, by and among  MXenergy Holdings Inc., the subsidiary guarantors party thereto and Law  Debenture Trust Company of New York, as trustee, related to MXenergy’s 13.25%  Senior Subordinated Secured Notes due 2014 (19)                                                                                                                                                                                          |
| 4.8                 |       | Form of 13.25% Senior Subordinated Secured Note due 2014  (included in Exhibit 4.7) (19)                                                                                                                                                                                                                                                                                                                                                                  |
| 4.9                 |       | Intercreditor and Subordination Agreement, dated as of September 22,  2009, by and among MXenergy Holdings Inc., Sempra Energy Trading LLC, as  facility agent, the other pledgors from time to time party thereto and Law  Debenture Trust Company of New York, as trustee (19)                                                                                                                                                                               |
| 4.10                |       | Notes Registration Rights Agreement, dated as of September 22,  2009, by and among MXenergy Holdings Inc., the subsidiary guarantors party  thereto and the holders of 13.25% Senior Subordinated Secured Notes due 2014  party thereto (19)                                                                                                                                                                                                                   |
| 4.11                |       | Equity Registration Rights Agreement, dated as of September 22,  2009, by and among MXenergy Holdings Inc. and the stockholders of MXenergy  Holdings Inc. party thereto (19)                                                                                                                                                                                                                                                                                  |
| 9.1                 |       | Class A Voting Agreement, dated as of September 22, 2009,  by and among the holders of Class A common stock party thereto (19)                                                                                                                                                                                                                                                                                                                       |
| 9.2                 |       | Class C Voting Agreement, dated as of September 22, 2009,  by and among the holders of Class C common stock party thereto (19)                                                                                                                                                                                                                                                                                                                       |
| 10.1                |       | Third Amended and Restated Credit Agreement, dated as of November 17,  2008, by and among MXenergy Inc. and MXenergy Electric Inc., as borrowers,  MXenergy Holdings Inc. and certain subsidiaries thereof, as guarantors, and  lenders party thereto (9)                                                                                                                                                                                                      |
| 10.2                |       | First Amendment to Third Amended and Restated Credit Agreement,  dated as of March 11, 2009, by and among MXenergy Inc. and MXenergy  Electric Inc., as borrowers, MXenergy Holdings Inc. and certain subsidiaries  thereof, as guarantors, and lenders party thereto (10)                                                                                                                                                                                     |
| 10.3                |       | Second Amendment to Third Amended and Restated Credit Agreement,  dated as of May 15, 2009, by and among MXenergy Inc. and MXenergy  Electric Inc., as borrowers, MXenergy Holdings Inc. and certain subsidiaries  thereof, as guarantors, and lenders party thereto (11)                                                                                                                                                                                      |
| 10.4                |       | Third Amendment and Waiver to Third Amended and Restated Credit  Agreement, dated as of May 29, 2009, by and among MXenergy Inc. and  MXenergy Electric Inc., as borrowers, MXenergy Holdings Inc. and certain  subsidiaries thereof, as guarantors, the lenders party thereto and Société  Générale, as administrative agent (12)                                                                                                         |
| 10.5                |       | Fourth Amendment and Waiver to the Third Amended and Restated  Credit Agreement, dated as of June 8, 2009, by and among MXenergy Inc.  and MXenergy Electric Inc., as borrowers, MXenergy Holdings Inc. and certain  subsidiaries thereof, as guarantors, the lenders party thereto and Société  Générale, as administrative agent (13)                                                                                                    |
| 10.6                |       | Fifth Amendment to the Third Amended and Restated Credit Agreement,  dated as of June 15, 2009, by and among MXenergy Inc. and MXenergy  Electric Inc., as borrowers, MXenergy Holdings Inc. and certain subsidiaries  thereof, as guarantors, the lenders party thereto and Société Générale, as  administrative agent (14)                                                                                                               |
| 10.7                |       | Sixth Amendment, Waiver and Consent to the Third Amended and  Restated Credit Agreement, dated as of July 31, 2009, by and among  MXenergy Inc. and MXenergy Electric Inc., as borrowers, MXenergy Holdings  Inc. and certain subsidiaries thereof, as guarantors, the lenders party  thereto and Société Générale, as administrative agent (15)                                                                                           |
| 10.8                |       | Seventh Amendment and Waiver to the Third Amended and Restated  Credit Agreement, dated as of August 14, 2009, by and among MXenergy  Inc. and MXenergy Electric Inc., as borrowers, MXenergy Holdings Inc. and  certain subsidiaries thereof, as guarantors, the lenders party thereto and  Société Générale, as administrative agent (16)                                                                                                |
| 10.9                |       | Eighth Amendment and Waiver to the Third Amended and Restated  Credit Agreement, dated as of August 31, 2009, by and among MXenergy  Inc. and MXenergy Electric Inc., as borrowers, MXenergy Holdings Inc. and  certain subsidiaries thereof, as guarantors, the lenders party thereto and  Société Générale, as administrative agent (17)                                                                                                 |
| 10.10               |       | Ninth Amendment and Waiver to the Third Amended and Restated Credit  Agreement, dated as of September 14, 2009, by                                                                                                                                                                                                                                                                                                                                             |

 

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|   |   | and among MXenergy Inc. and MXenergy Electric Inc., as borrowers,  MXenergy Holdings Inc. and certain subsidiaries thereof, as guarantors, the  lenders party thereto and Société Générale, as administrative agent (18)                                                                                                                                                                             |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11  |   | First Amended and Restated Pledge Agreement, dated as of  August 1, 2006, by and among MXenergy Inc. and MXenergy Electric Inc.,  as borrowers, MXenergy Holdings Inc. and certain subsidiaries thereof, as guarantors,  and Société Générale (1)                                                                                                                                               |
| 10.12  |   | First Amended and Restated Security Agreement, dated as of  August 1, 2006, by and among MXenergy Inc. and MXenergy Electric Inc.,  as borrowers, MXenergy Holdings Inc. and certain subsidiaries thereof, as  guarantors, and Société Générale (1)                                                                                                                                             |
| 10.13  |   | Subordination and Intercreditor Agreement, dated as of  December 19, 2005, by and among Société Générale and certain  counterparties, Denham Commodity Partners Fund LP (formerly known as Sowood  Commodity Partners Fund LP), MXenergy Holdings Inc., MXenergy Inc., MXenergy  Electric Inc. and certain of their respective subsidiaries and Virginia Power  Energy Marketing, Inc. (1) |
| 10.14  |   | Amendment No. 1, dated as of August 1, 2006, to the  Subordination and Intercreditor Agreement, dated as of December 19,  2005, by and among Société Générale and certain counterparties, Denham  Commodity Partners Fund LP (formerly known as Sowood Commodity Partners Fund  LP), MXenergy Holdings Inc., MXenergy Inc. and certain of their respective subsidiaries  (1)          |
| 10.15  |   | Amendment No. 2, dated as of November 7, 2008, to the  Subordination and Intercreditor Agreement dated as of December 19, 2005,  by and among Société Générale (as Administrative Agent for various secured  counterparties), Denham Commodity Partners Fund LP, MXenergy Holdings Inc.,  MXenergy Inc., MXenergy Electric Inc. and certain of their respective  subsidiaries****(23) |
| 10.16  |   | Amendment No. 3, dated as of June 8, 2009, to the  Subordination and Intercreditor Agreement dated as of December 19, 2005,  by and among Société Générale, Denham Commodity Partners Fund LP, MXenergy  Holdings Inc., MXenergy Inc., MXenergy Electric Inc. and certain of their  respective subsidiaries (13)                                                                      |
| 10.17  |   | Master Transaction Agreement, dated as of August 1, 2006, by  and among MXenergy Inc., MXenergy Holdings Inc. and certain subsidiaries  thereof, as guarantors, and Société Générale (1)                                                                                                                                                                                                        |
| 10.18  |   | First Amendment to Master Transaction Agreement, dated as of  April 6, 2007, by and among MXenergy Inc., MXenergy Holdings Inc. and certain  subsidiaries thereof, as guarantors, and Société Générale (1)                                                                                                                                                                                      |
| 10.19  |   | Second Amendment to Master Transaction Agreement, dated as of  December 17, 2007, by and among MXenergy Inc., MXenergy Holdings Inc.  and certain subsidiaries thereof, as guarantors, and Société Générale (4)                                                                                                                                                                                 |
| 10.20  |   | Third Amendment to Master Transaction Agreement, dated as of  May 12, 2008, by and among MXenergy Inc., MXenergy Holdings Inc. and  certain subsidiaries thereof, as guarantors, and Société Générale (5)                                                                                                                                                                                       |
| 10.21  |   | Fourth Amendment to Master Transaction Agreement, dated as of  July 31, 2008, by and among MXenergy Inc., MXenergy Holdings Inc. and  certain subsidiaries thereof, as guarantors, and Société Générale (7)                                                                                                                                                                                     |
| 10.22  |   | Fifth Amendment to Master Transaction Agreement, dated as of  September 30, 2008, by and among MXenergy Inc., MXenergy Holdings Inc.  and certain subsidiaries thereof, as guarantors, and Société Générale (6)                                                                                                                                                                                 |
| 10.23  |   | Sixth Amendment to Master Transaction Agreement, dated as of  November 5, 2008, by and among MXenergy Inc., MXenergy Holdings Inc. and  certain subsidiaries thereof, as guarantors, and Société Générale (8)                                                                                                                                                                                   |
| 10.24  |   | Seventh Amendment to Master Transaction Agreement, dated as of  November 7, 2008, by and among MXenergy Inc., MXenergy Holdings Inc. and  certain subsidiaries thereof, as guarantors, and Société Générale (8)                                                                                                                                                                                 |
| 10.25  |   | Eighth Amendment to Master Transaction Agreement, dated as of  November 17, 2008, by and among MXenergy Inc., MXenergy Holdings Inc.  and certain subsidiaries thereof, as guarantors, and Société Générale (9)                                                                                                                                                                                 |
| 10.26  |   | Ninth Amendment to Master Transaction Agreement, dated as of March 16,  2009, by and among MXenergy Inc., MXenergy Holdings Inc. and certain  subsidiaries thereof, as guarantors, and Société Générale (10)                                                                                                                                                                                    |
| 10.27  |   | Tenth Amendment to Master Transaction Agreement, dated as of May 15,  2009, by and among MXenergy Inc., MXenergy Holdings Inc. and certain  subsidiaries thereof, as guarantors, and Société Générale (11)                                                                                                                                                                                      |
| 10.28  |   | Eleventh Amendment to Master Transaction Agreement, dated as of May 29,  2009, by and among MXenergy Inc., MXenergy Holdings Inc. and certain  subsidiaries thereof, as guarantors, and Société Générale, as hedge provider  (12)                                                                                                                                                               |
| 10.29  |   | Twelfth Amendment to the Master Transaction Agreement, dated as of  June 8, 2009, by and among MXenergy Inc., MXenergy Holdings Inc. and  certain subsidiaries thereof, as guarantors, and Société Générale, as hedge  provider (13)                                                                                                                                                            |
| 10.30  |   | Thirteenth Amendment to the Master Transaction Agreement, dated as  of July 31, 2009, by and among MXenergy Inc., MXenergy Holdings Inc. and  certain subsidiaries thereof, as guarantors, and Société Générale, as hedge  provider (15)                                                                                                                                                        |
| 10.31  |   | Fourteenth Amendment to the Master Transaction Agreement, dated as  of August 14, 2009, by and among MXenergy Inc., MXenergy Holdings Inc.  and certain subsidiaries thereof, as guarantors, and Société Générale, as  hedge provider (16)                                                                                                                                                      |
| 10.32  |   | Fifteenth Amendment to the Master Transaction Agreement, dated as  of August 31, 2009, by and among MXenergy Inc., MXenergy Holdings Inc.  and certain subsidiaries thereof, as guarantors, and Société Générale, as  hedge provider (17)                                                                                                                                                       |
| 10.33  |   | Sixteenth Amendment to the Master Transaction Agreement, dated as  of September 3,****2009, by and  among MXenergy Inc., MXenergy Holdings Inc. and certain subsidiaries thereof,  as guarantors, and Société Générale, as hedge provider (23)                                                                                                                                                  |
| 10.34  |   | Seventeenth Amendment and Waiver to the Master Transaction  Agreement, dated as of September 14, 2009, by and among MXenergy Inc.,  MXenergy Holdings Inc. and certain subsidiaries thereof, as guarantors, and  Société Générale, as hedge provider (18)                                                                                                                                       |
| 10.35  |   | Employment Agreement, dated as of February 13, 2008, by and  between MXenergy Holdings Inc. and Jeffrey Mayer # (4)                                                                                                                                                                                                                                                                                                 |
| 10.36  |   | Employment Agreement, dated as of April 1, 1999, by and between  MXenergy Holdings Inc. and Carole R. (“Robi”) Artman- Hodge # (1)                                                                                                                                                                                                                                                                        |
| 10.37  |   | Severance Agreement, dated  May 14, 2010, by and between MXenergy Holdings Inc. and Carole R.  Artman-Hodge # (21)                                                                                                                                                                                                                                                                                                  |
| 10.38  |   | Employment Agreement, dated as of February 13, 2008, by and  between MXenergy Holdings Inc. and Chaitu Parikh # (4)                                                                                                                                                                                                                                                                                                 |
| 10.39  |   | Relocation Agreement,  dated May 10, 2010, by and between MXenergy Holdings Inc. and Chaitu  Parikh # (21)                                                                                                                                                                                                                                                                                                          |
| 10.40  |   | First Amendment to  Employment Agreement, dated as of May 14, 2010, by and between MXenergy  Holdings Inc. and Chaitu Parikh # (22)                                                                                                                                                                                                                                                                                 |
| 10.41  |   | Employment Agreement, dated as of June 13, 2007, by and  between MXenergy Inc. and Gina Goldberg # (2)                                                                                                                                                                                                                                                                                                              |
| 10.42  |   | Amendment to the Employment Agreement, dated as of December 31,  2008, by and between MXenergy Holdings Inc. and                                                                                                                                                                                                                                                                                                    |

 

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|   |   | Gina Goldberg # *                                                                                                                                                                                                                                                                                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.43  |   | Employment Letter Agreement, dated as of March 27, 2001, by  and between MXenergy Inc. and Robert Blake # *                                                                                                                                                                                         |
| 10.44  |   | Amendment to Employment Letter Agreement, dated as of December 30,  2009, by and between MXenergy Inc. and Robert Blake # *                                                                                                                                                                         |
| 10.45  |   | Employment Agreement, dated as of April 1, 2010, by and  between MXenergy Inc. and Robert Werner # *                                                                                                                                                                                                |
| 10.46  |   | MXenergy Holdings Inc. 2010 Stock Incentive Plan # (20)                                                                                                                                                                                                                                                  |
| 10.47  |   | Form of Restricted Stock Award Agreement: Officers under the  2010 Stock Incentive Plan # (20)                                                                                                                                                                                                      |
| 10.48  |   | Form of Restricted Stock Award Agreement: Non-Employee  Directors under the 2010 Stock Incentive Plan # (20)                                                                                                                                                                                        |
| 10.49  |   | ISDA Master Agreement, dated as of September 22, 2009, between  Sempra Energy Trading LLC and MXenergy Inc. (including the schedule thereto)  (19)                                                                                                                                                  |
| 10.50  |   | ISDA Master Agreement, dated as of September 22, 2009, between  Sempra Energy Trading LLC and MXenergy Electric Inc. (including the schedule  thereto) (19)                                                                                                                                         |
| 10.51  |   | Letter of Agreement, dated  as of March 1, 2010, by and among MXenergy Inc. and Sempra Energy  Trading LLC (21)                                                                                                                                                                                     |
| 10.52  |   | Second Amendment to the ISDA Master Agreement, dated as of December 21,  2009, between Sempra Energy Trading LLC and MXenergy Inc. (20)                                                                                                                                                             |
| 10.53  |   | Third Amendment, dated as  of May 28, 2010, to the ISDA Master Agreement, dated as of September 22,  2009, among Sempra Energy Trading LLC, MXenergy Inc. and the Specified  Entities Party Thereto (24)                                                                                       |
| 10.54  |   | Second Amendment, dated as  of May 28, 2010, to the ISDA Master Agreement, dated as of September 22,  2009, among Sempra Energy Trading LLC, MXenergy Electric Inc. and the  Specified Entities Party Thereto (24)                                                                             |
| 10.55  |   | Guarantee and Collateral Agreement, dated as of September 22,  2009, among MXenergy Holdings Inc., MXenergy Electric Inc., MXenergy Inc. and  the other subsidiaries of MXenergy Holdings Inc. party thereto, as grantors,  and Sempra Energy Trading LLC, as secured party (19)                    |
| 10.56  |   | First Amendment, dated as  of May 28, 2010, to the Guarantee and Collateral Agreement, dated as of  September 22, 2009, among MXenergy Holdings Inc., MXenergy Electric  Inc., MXenergy Inc. and the Other Parties Thereto, as Grantors, and Sempra  Energy Trading LLC, as Secured Party (24) |
| 10.57  |   | Stockholders Agreement, dated as of September 22, 2009, by and  among MXenergy Holdings Inc. and the stockholders of MXenergy Holdings Inc.  party thereto (19)                                                                                                                                     |
| 10.58  |   | Amendment No. 1 to  the Stockholders Agreement, dated as of July 26, 2010, by and among MXenergy Holdings Inc. and the stockholders of  MXenergy Holdings Inc. party thereto (25)                                                                                                              |
| 10.59  |   | Amendment and Waiver Agreement, dated as of September 22,  2009, among MXenergy Holdings Inc. and the stockholders of MXenergy Holdings  Inc. party thereto (19)                                                                                                                                    |
| 10.60  |   | Second Lien Collateral Agreement, dated as of September 22,  2009, by and among MXenergy Holdings Inc., the subsidiary guarantors party  thereto and Law Debenture Trust Company of New York, as collateral agent (19)                                                                              |
| 10.61  |   | Notes Escrow and Security Agreement, dated as of September 22,  2009, by and among MXenergy Holdings Inc., Law Debenture Trust Company of New  York, as trustee, and Law Debenture Trust Company of New York, as collateral  agent (19)                                                             |
| 10.62  |   | Form of Guarantee of 13.25% Senior Subordinated Notes due 2014  (included in Exhibit 4.7) (19)                                                                                                                                                                                                 |
| 21     |   | Subsidiaries of MXenergy Holdings Inc. *                                                                                                                                                                                                                                                                 |
| 31.1   |   | Certification as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 *                                                                                                                                                                                                               |
| 31.2   |   | Certification as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 *                                                                                                                                                                                                               |
| 32     |   | Certification required by 18 United States Code Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * †                                                                                                                                                   |

 

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| *         |   | Filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| †    |   | Pursuant to Securities and Exchange Commission Release  No. 33-8238, this certification will be treated as “accompanying” this  Annual Report on Form 10-K and not “filed” as part of such report for  purposes of Section 18 of the Securities Exchange Act of 1934, or  otherwise subject to the liability of Section 18 of the Securities  Exchange Act of 1934 and this certification will not be deemed to be  incorporated by reference into any filing under the Securities Act of 1933 or  the Securities Exchange Act of 1934, except to the extent that the registrant  specifically incorporates it by reference. |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| #         |   | Material compensation contract.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (1)       |   | Filed with the Company’s Registration Statement on Form S-4  (File No. 333-138425) declared effective on April 30, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (2)       |   | Filed with the Company’s Annual Report on Form 10-K for the  fiscal year ended June 30, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (3)  |   | Filed with the Company’s Current Report on Form 8-K filed on  August 1, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (4)       |   | Filed with the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended December 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (5)       |   | Filed with the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended March 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (6)       |   | Filed with the Company’s Annual Report on Form 10-K for the  fiscal year ended June 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (7)       |   | Filed with the Company’s Current Report on Form 8-K filed on  August 1, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (8)       |   | Filed with the Company’s Current Report on Form 8-K filed on  November 12, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

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| (9)    |   | Filed with the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended September 30, 2008. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                      |
| (10)   |   | Filed with the Company’s Current Report on Form 8-K filed on  March 18, 2009.                              |
|   |   |                                                                                                                      |
| (11)   |   | Filed with the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended March 31, 2009.     |
|   |   |                                                                                                                      |
| (12)   |   | Filed with the Company’s Current Report on Form 8-K filed on  June 3, 2009.                                |
|   |   |                                                                                                                      |
| (13)   |   | Filed with the Company’s Current Report on Form 8-K filed on  June 12, 2009.                               |
|   |   |                                                                                                                      |
| (14)   |   | Filed with the Company’s Current Report on Form 8-K filed on  June 18, 2009.                               |
|   |   |                                                                                                                      |
| (15)   |   | Filed with the Company’s Current Report on Form 8-K filed on  August 3, 2009.                              |
|   |   |                                                                                                                      |
| (16)   |   | Filed with the Company’s Current Report on Form 8-K filed on  August 18, 2009.                             |
|   |   |                                                                                                                      |
| (17)   |   | Filed with the Company’s Current Report on Form 8-K filed on  September 3, 2009.                           |
|   |   |                                                                                                                      |
| (18)   |   | Filed with the Company’s Current Report on Form 8-K filed on  September 16, 2009.                          |
|   |   |                                                                                                                      |
| (19)   |   | Filed with the Company’s Current Report on Form 8-K filed on  September 28, 2009.                          |
|   |   |                                                                                                                      |
| (20)   |   | Filed with the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended December 31, 2009.  |
|   |   |                                                                                                                      |
| (21)   |   | Filed with the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended March 31, 2010.     |
|   |   |                                                                                                                      |
| (22)   |   | Filed with the Company’s Current Report on Form 8-K filed on  May 27, 2010.                                |
|   |   |                                                                                                                      |
| (23)   |   | Filed with the Company’s Annual Report on Form 10-K for the  fiscal year ended June 30, 2009.              |
|   |   |                                                                                                                      |
| (24)   |   | Filed with the Company’s Current Report on Form 8-K filed on  June 3, 2010.                                |
|   |   |                                                                                                                      |
| (25)   |   | Filed with the Company’s Current Report on Form 8-K filed on  July 28, 2010.                               |

 

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