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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**

** **

**x****      ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the fiscal year ended June 30,2009**

** **

**OR**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT 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 in Rule 405under the Securities Act.    Yes o No x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or 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 x No o

 

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 this Form 10-Kor 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 definition of “accelerated filer, largeaccelerated 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 in Rule 12b-2of 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.

 

As of September 30,2009, there were 54,305,112 shares of the Registrant’s 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 30,2009**

 

**TABLE OF CONTENTS**

 
| **Item  Number**  | ** **                                                                                                          | **Page  Number** |
|-------------------|---------------------------------------------------------------------------------------------------------------------|------------------|
|              |                                                                                                                |             |
| **PART I**   | ** **                                                                                                          |
| 1.                | Business                                                                                                            | 4                |
| 1A.               | Risk Factors                                                                                                        | 19               |
| 1B.               | Unresolved  Staff Comments                                                                                          | 28               |
| 2.                | Properties                                                                                                          | 28               |
| 3.                | Legal Proceedings                                                                                                   | 28               |
| 4.                | Submission  of Matters to a Vote of Security Holders                                                                | 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                                                         | 62               |
| 8.                | Financial  Statements and Supplementary Data                                                                        | 65               |
| 9.                | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | 113              |
| 9A(T).            | Controls and  Procedures                                                                                            | 113              |
| 9B.               | Other Information                                                                                                   | 116              |
|              |                                                                                                                |             |
| **PART III** | ** **                                                                                                          |
| 10.               | Directors,  Executive Officers and Corporate Governance                                                             | 117              |
| 11.               | Executive  Compensation                                                                                             | 122              |
| 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                                                                             | 146              |
|              |                                                                                                                |             |
| **PART IV**  | ** **                                                                                                          |
| 15.               | Exhibits  and Financial Statement Schedules                                                                         | 147              |
|              |                                                                                                                |             |
| **SIGNATURES**    | 148                                                                                                                 |

 

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# **FORWARD-LOOKINGSTATEMENTS**

# ** **

Some statements in this Annual Report on Form 10-K(the “Annual Report”) are known as “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended (the “SecuritiesAct”) and Section 21E of the Securities Exchange Act of 1934 (the “ExchangeAct”).  Forward-looking statementsinclude, but are not limited to, statements about our plans, objectives,expectations and intentions and other statements contained in the Annual Reportthat are not historical facts and may relate to, among other things:

 

·                  future performance generally;

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

·                  our post-acquisition integration of acquired businesses;

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

·                  expectations regarding the effectiveness of our hedging practices andthe performance of suppliers, pipelines and transmission companies, storageoperators, independent system operators, financial hedge providers, banksproviding working capital and other counterparties supplying, transporting, andstoring physical commodity.

 

When used in the Annual Report, the words “may,” “will,”“should,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “predicts,”“estimates,” “potential,” “continue,” “projected” and similar expressions aregenerally intended to identify forward-looking statements, although the absenceof such a word 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 factorsidentified in “Risk Factors,” among others, could cause our financialperformance to differ significantly from the goals, plans, objectives,intentions and expectations expressed in our forward-looking statements:

 

·                  failures in our risk management policies and hedging procedures;

·                  shortfalls in marketing or unusual customer attrition that result inour purchases exceeding our supply commitments;

·                  unavailability or lack of reliability in monthly settlement index prices;

·                  changes in the forward prices of natural gas and electricity;

·                  insufficient liquidity to properly implement our hedging strategy ormanage commodity supply;

·                  changes in weather patterns from historical norms that affect consumerconsumption patterns;

·                  failure to collect imbalance receivables;

·                  failure of our customers to pay their bills or our failure to maintainadequate billing and collection procedures;

·                  disruptions in local transportation and transmission facilities;

·                  changes in regulations that affect our ability to use marketingchannels;

·                  changes in statutes or regulations that inhibit growth or increasecosts and impact profitability;

·                  failure to properly manage our growth;

·                  the loss of key members of management or failure to retain employees;

·                  changes in general economic conditions;

·                  competition from utilities and other marketers;

·                  malfunctions in computer hardware or software or in database managementsystems or power systems, due to mechanical or human error, that result in billingerrors or problems with collections, reconciliation, accounting or riskmanagement;

·                  natural disasters, including hurricanes;

·                  our reliance on energy infrastructure and transportation within theUnited States and Canada; and

·                  other factors not currently known or considered material by us.

 

Therefore, we caution you not to place undue relianceon any forward-looking statements.  Weundertake no obligation to publicly update or revise any forward-lookingstatements after the date of this Annual Report to conform these statements toactual results.  All forward-lookingstatements attributable to us are expressly qualified by these cautionarystatements.

 

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** **

**PART I**

 

**ITEM 1. BUSINESS**

 

**Definitions**

 

References in this AnnualReport on Form 10-K (“Annual Report”) to “Holdings” refer to MXenergyHoldings Inc., a Delaware corporation. References to “the Company,” “we,” “us,” “our,” or similar terms referto Holdings together with its consolidated subsidiaries.

 

References to “MMBtu”refer to a million British thermal units, a standard unit of heating equivalentmeasure for natural gas. A unit of heat equal to 1,000,000 Btus, or 1 MMBtu, isthe thermal equivalent of approximately 1,000 cubic feet of natural gas. Onebillion cubic feet, or BCF, of gas is slightly less than 1,000,000 MMBtus.

 

References to “MWhr”refer to a million watt hours or a thousand kilowatt hours, which is the amountof electric energy produced or consumed in a period of time.

 

References to “RCEs”refer to residential customer equivalents, each of which represents a naturalgas customer with a standard consumption of 100 MMBtus per year or an electricitycustomer with a standard consumption of 10 MWhrs per year. These quantities,which are used for convenience, represent the approximate amount of natural gasor power used by a typical household in some parts of the country.

 

References to “LDC” referto a local distribution company, or utility, that provides the distributioninfrastructure to supply natural gas and electricity to our customers.  In some cases, LDCs also provide billingservices and guarantee customer accounts receivable within various markets thatwe serve.

 

References to “customers”refer to individual accounts served by us. An individual or business with multiple accounts will be countedmultiple times in our tabulation of customers. An individual or business may be counted as a single customer despitehaving multiple meters in a single location. 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 and History**

 

Holdings was founded in April 1999, and Holdingswas incorporated in the state of Delaware in 2005 as part of a corporatereorganization.  Headquartered inStamford, Connecticut, we are an independent energy provider of retail naturalgas and electric power to residential and commercial customers in deregulatedmarkets in the United States (the “U.S.”) and Canada.  We are one of a small number of retail energymarketers in the growing deregulated market. We currently serve natural gas and electricity customers located in 39market areas across 14 states in the U.S. and in the provinces of Ontario andBritish Columbia in Canada.

 

The following mapreflects the states in the U.S. and the Canadian provinces where we havenatural gas and electricity customers.

 

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**Our CoreBusinesses and Products**

 

Our core business is the retail sale of natural gasand electricity to end-use customers in deregulated markets in the U.S. andCanada.  Accordingly, our business isclassified into two reportable business segments: natural gas and electricity.  Through these business units, natural gas andelectricity are generally sold at contracted prices based on usage bycustomers. We buy natural gas and electricity in the wholesale market in timeand location specific, bulk or block quantities at fixed and indexed prices.

 

We sell natural gas and electricity at variable ormarket-based prices that, in most cases, change monthly or at fixed prices fora forward term that generally does not exceed two years.  In the case of variable sales contracts aswell as most mid-market commercial sales, we purchase natural gas orelectricity at the time of sale.  In thecase of fixed price retail customers, we purchase natural gas and electricityin advance of sales.  Costs are marked upwith a reasonable profit margin.

 

For fixed price sales contracts, the cost of the commodityis hedged in the forward markets with financial swaps and physical forwardcontracts that settle monthly.  Thenatural gas and electricity is then purchased at the time such swaps andforward contracts settle.  We regularlycalculate the amount of the commodity required to meet our expected customerdeliveries and balance this against the quantity hedged or purchased for suchcustomers.  Differences between expectedcustomer deliveries and commodity purchases are managed by adjusting naturalgas deliveries from storage and buying any shortfall or selling any excess inthe spot market.

 

We market variations of two basic products:

 

·                              **Fixedprice contracts*—***Generally with****terms of up to two years for natural gasand electricity, 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.

 

Wehave a risk management policy that is intended to reduce our financial exposurerelated to changes in the price 

 

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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. Any difference between actual consumption and our purchased commodityvolume results in pricing risk for the month.

 

·                              **Variableprice contracts*—***Variable price products generally arepriced competitively with the price offered by the region’s incumbent utilityand/or other local competitors (the “price to compare” or “PTC”).  Our variable rate product is similar to utilityvariable rate pricing.  By usingalternative supply arrangements, we are sometimes able to supply customers withthe commodity at a price lower than the utility’s tariff pricing due to theutility’s prior period cost recovery charges or fixed term transportationcosts.  We do not guarantee to customersthat our price will be below the PTC.

 

Wegenerally do not hedge to protect against price volatility associated withdeliveries under variable rate natural gas contracts because our variable priceis set ahead of the month of commodity flow, which ensures a direct correlationbetween our cost for commodity delivered and the price charged to the customer.

 

Forelectricity, our variable prices are set prior to the beginning of the month ofcommodity flow.  We purchase commodityfor delivery based on our expected customer usage for that month.  Any difference between actual consumption andour purchased commodity volume results in pricing risk for the month.

 

The natural gas andelectricity sold is metered and delivered to customers by LDCs.  Except in our Georgia natural gas and Texaselectricity markets and for certain of our commercial customers, LDCs generallyprovide billing and collection services on our behalf for residential and smallcommercial customers.  In the case of ourGeorgia and Texas retail markets, we bill and collect directly from customersthe price of delivered commodity plus the charges associated with the localutility’s distribution costs, the latter of which is remitted to such utility.

 

Sales of natural gas andelectricity 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.

 
| ** **   | ** ** | **Fiscal Year Ended June 30,** | ** **  |
|--------------|------------|----------------------------------------------------|-------------|
| ** **   | ** ** | **2009**                                           | ** **  | **2008** | ** ** | **2007** | ** ** |
| ** **   | ** ** | **Sales**                                          | ** **  | **% of  Total** | ** ** | **Sales** | ** ** | **% of  Total** | ** ** | **Sales** | ** ** | **% of  Total** | ** ** |
| ** **   | ** ** | **($ in thousands)**                     | ** **  |
|         |       |                                               |        |   |   |   |   |   |   |   |   |   |   |
| Natural  gas | ** ** | **$**                                              | **670,584** | ** ** | **85** |   | $ | 669,522 |   | 89 |   | $ | 680,811 |   | 97 |   |
| Electricity  | ** ** | **119,196**                                        | ** **  | **15** |   | 82,761 |   | 11 |   | 23,115 |   | 3 |   |
| Total  sales | ** ** | **$**                                              | **789,780** | ** ** | **100** |   | $ | 752,283 |   | 100 |   | $ | 703,926 |   | 100 |   |

 

**RecentDevelopments and Trends**

 

***Debt and Equity Restructuring***

 

A sharp drop in naturalgas market prices during the six months ended December 31, 2008 resultedin a significant reduction in the natural gas inventory component of theavailable borrowing base under our revolving credit facility with a syndicateof banks (the “Revolving Credit Facility”). The reduced borrowing base strained our ability to post letters ofcredit as collateral with suppliers and hedge providers, caused defaults ofcertain financial covenants included in the agreement that governed theRevolving Credit Facility, prompted downgrades in our credit ratings andultimately resulted in our seeking and obtaining material waivers of debt covenantsand defaults and amendments to the agreement that governed the Revolving CreditFacility and our principal commodity hedge facility (the “Hedge Facility”).Such amendments had the following material direct impacts on our liquidityposition:

 

·                  The maturity dates of the RevolvingCredit Facility and Hedge Facility were extended to September 2009.

·                  The maximum amount that could be borrowedunder the Revolving Credit Facility was reduced from $280.0 million at June 30,2008 to $115.0 million at June 30, 2009, and $94.0 million effective July 31,2009.

·                  We were required to actively seek a newfacility to replace the Revolving Credit Facility and Hedge Facility.

 

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·                  Through June 30, 2009, we paidapproximately $8.7 million of fees related to all amendments and extensions,which were deferred on the consolidated balance sheet and are being amortizedas an increase to interest expense over the remaining lives of the RevolvingCredit Facility and Hedge Facility. During fiscal year 2009, we recorded approximately $7.5 million ofincremental interest expense resulting from amortization of these deferredcosts.

 

Given the negativeconditions in the economy generally and the credit markets in particular, therewas substantial uncertainty that we would be able to secure a refinancing ofthe Revolving Credit Facility without a material restructuring of our debt andequity position.

 

On September 22,2009, we consummated an equity and debt restructuring (the “Restructuring”),which was intended to reduce our debt exposure and interest expense, improveour liquidity and improve our financial and operational flexibility in order toallow us to compete more effectively.  Inparticular, the Restructuring included, among other things, the transactionsdiscussed below.

 

**Amendmentand Restatement of Corporate Documents**

 

Effective September 22,2009, our Certificate of Incorporation and Bylaws were amended and restated,and we entered into a new stockholder agreement with holders of various classesof our newly authorized common stock. These documents contain customary provisions, including provisionsrelating to certain approval rights, preemptive rights, share transferrestrictions, rights of first refusal, tag-along rights and drag-along rights.

 

Additionally, the amendedand restated Certificate of Incorporation authorized the issuance of200,000,000 shares of Common Stock, consisting of 50,000,000 shares of Class ACommon Stock, 10,000,000 shares of Class B Common Stock, 40,000,000 sharesof Class C Common Stock and 100,000,000 shares of Class D CommonStock.  Prior to the consummation of theRestructuring, we had 4,681,219 shares of common stock issued andoutstanding.  Those shares of commonstock were exchanged for 4,499,588 shares of newly authorized Class CCommon Stock, which represented 8.29% of the aggregate shares of common stockoutstanding after the consummation of the Restructuring.  Additional shares of Class A CommonStock, Class B Common Stock and Class C Common Stock were issued tovarious parties as a result of the Restructuring, as described separatelybelow.

 

As a result of amendmentsand restatements to our corporate documents, effective September 22, 2009,our board of directors increased to nine members from eight members prior toconsummation of the Restructuring.  Thecomposition of the new board of directors (the “Board of Directors”) isdescribed below:

 

·                  Holders of the Class A Common Stockare entitled to nominate and elect five directors, at least two of whom shallbe independent and qualify as a “financial expert.”

·                  The holder of Class B Common Stockis entitled to nominate and elect one director (the “Class B Director”).

·                  Holders of Class C Common Stock areentitled to nominate and elect two directors (the “Class C Directors”).

·                  The ninth Director is Holdings’ presidentand chief executive officer.

 

Refer to Part III ofthis Annual Report for the names and backgrounds of members of the Board ofDirectors.

 

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

 

As of June 30, 2009,we had $165.2 million aggregate principal amount of Floating Rate Notes due2011 outstanding (the “Floating Rate Notes due 2011”).  On September 22, 2009, we consummated anexchange offer pursuant to which we exchanged $158.8 million aggregateprincipal amount of Floating Rate Notes due 2011 for $26.7 million of cash,$67.8 million aggregate principal amount of new 13.25% Senior SubordinatedSecured Notes due 2014 (the “Fixed Rate Notes due 2014”) and 33,940,683 sharesof newly authorized Class A Common Stock. The shares of Class A Common Stock issued to the holders of theFixed Rate Notes due 2014 represented 62.5% of the aggregate shares of commonstock outstanding after consummation of the Restructuring.  The Fixed Rate Notes due 2014 were issued ata discount, which will be recorded as a reduction from the Fixed Rate Notes due2014 on our consolidated balance sheet during the first quarter of fiscal year2010, and which will be amortized as an increase to interest expense over theremaining life of the Fixed Rate Notes due 2014.

 

Holders of $6.4 millionaggregate principal amount of Floating Rate Notes due 2011 did not tender theirnotes pursuant to the Restructuring. These Floating Rate Notes due 2011 will remain on our consolidatedbalance sheets until their maturity date in August 2011 unless acquired orretired by us on an earlier date.  Theindenture governing the Floating Rate Notes due 2011 was amended to eliminatesubstantially all of the restrictive covenants and certain events of defaultfrom such indenture.

 

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**NewMaster Hedge and Supply Agreement**

 

As of June 30, 2009,we relied on the following credit, commodity hedging and commodity supplyarrangements for operation of our natural gas and electricity businesses:

 

·                  The Revolving Credit Facility was used primarily to post letters ofcredit required to effectively operate within the markets that we serve;

·                  The Hedge Facility was used as our primary facility to economicallyhedge variability in the cost of natural gas;

·                  Commodity derivative arrangements with various counterparties were usedto economically hedge variability in the cost of electricity; and

·                  Arrangements with numerous commodity suppliers to supply natural gasand electricity necessary for customer consumption in the markets that weserve.

 

Effective September 22,2009, the Revolving Credit Facility and Hedge Facility were replaced by a newexclusive supply and commodity hedging agreement (the “Commodity Supply Facility”)with Sempra Energy Trading LLC (“RBS Sempra”), which effectively replaced theseparate credit, hedging and supply arrangements outlined above.  As a condition to the entry into theagreements governing the Commodity Supply Facility, we issued 4,002,290 sharesof newly authorized Class B Common Stock to RBS Sempra, which represented7.37% of our aggregate shares of common stock outstanding after consummation ofthe Restructuring.  The aggregate fairvalue of the common stock issued to RBS Sempra was recorded as deferredfinancing costs in other assets on the consolidated balance sheets during thefirst quarter of fiscal year 2010 and will be amortized over the remaining termof the Commodity Supply Facility.

 

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

 

As of June 30, 2009,we had 1,451,310 shares of Series A convertible preferred stock (the “PreferredStock”) outstanding, which was recorded at its estimated redemption value of$54.6 million on the consolidated balance sheets.  On September 22, 2009, all outstandingshares of redeemable convertible preferred stock were exchanged for 11,862,551shares of newly authorized Class C Common Stock, which represented 21.84%of the aggregate shares of our common stock outstanding after consummation ofthe Restructuring.  The excess of theredemption value over the aggregate fair value of common stock issued to theholders of Preferred Stock was reclassified to stockholders’ equity on theconsolidated balance sheets during the first quarter of fiscal year 2010.  In connection with the Restructuring, wefiled an amended and restated Certificate of Incorporation that does notauthorize any preferred stock.

 

**Terminationof the Credit Agreement with Denham Commodity Partners LP (“Denham”)**

 

As of June 30, 2009,we had a $12.0 million outstanding balance under a credit agreement with DenhamCommodity Partners LP (the “Denham Credit Facility”).  On September 22, 2009, all amountspreviously borrowed, including accrued and unpaid interest, were repaid and theDenham Credit Facility was terminated.

 

**NewManagement Incentive Plan and Bonuses**

 

In connection with theRestructuring, we anticipate that our board of directors will authorize thecreation of a new management incentive plan (the “Management Incentive Plan”)pursuant to which they may issue Class C Common Stock not to exceed 10% ofour outstanding common stock (on a fully diluted basis) after giving effect tothe Restructuring.  We expect that theManagement Incentive Plan will provide the board of directors the flexibilityto make awards to employees, officers, directors, consultants and advisors andwill permit, among other things, the grant of options to purchase shares ofcommon stock that are intended to qualify as incentive stock options under Section 422of the Internal Revenue Code, grants of options to purchase shares of commonstock that will not so qualify, grants of stock appreciation rights, and grantsof common stock at incentive prices or for free.

 

In addition, the compensationcommittee of the board of directors approved a total bonus pool equal to$750,000, which was paid to 19 of our executive officers and employees,including our chief executive officer and chief financial officer, uponconsummation of the Restructuring.

 

**Settlementand Cancellation of Existing Options and Warrants**

 

As of June 30, 2009,we had options and warrants outstanding which were, or may be, exercisable for1,008,770 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 our common stock exceeded thecurrent fair value of the common stock). Pursuant to the Restructuring, we terminated the existing share-based 

 

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compensation plans andoffered a cash settlement to holders of options and warrants to cancel andterminate such options and warrants.  Asa result, all outstanding options and warrants were cancelled andterminated.  The total amount paid forsuch cash settlement payments was approximately $0.2 million, which wasrecorded as a general and administrative expense during the first quarter offiscal year 2010.

 

**Our Customer Portfolio**

 

Our customer base consists of residential and smalland mid-market commercial customers.  Wehave limited exposure to high concentrations of sales volumes to individualcustomers.  For the fiscal years ended June 30,2009, 2008 and 2007, our largest customer accounted for approximately 2% oftotal sales volume.

 

The following graphillustrates changes in our average annual RCE count from fiscal year 2005through fiscal year 2009.

 

 

The reduction in averageRCEs during fiscal year 2009 resulted primarily from liquidity-relatedlimitations placed on our ability to obtain new customers and to retainexisting customers and from high credit-related attrition in certain of ourmarkets.  Volatility in natural gasprices negatively impacted our liquidity position and resulted in amendments toour Revolving Credit Facility, which placed formal constraints on the term andtype of contracts that we could offer to new customers and to existingcustomers who informed us of their intent to terminate their contract beforeits termination date.

** **

**In order to conserve cash, we alsoreduced direct mail marketing and advertising expenditures and scaled back ouruse of certain sales channels during fiscal year 2009, which had a negativeimpact on brand awareness and our ability to acquire new customers.  As our overall liquidity position improves asa result of the Restructuring, we expect to return to our customary sales andmarketing practices and channels.**

** **

**Deteriorating economic conditionsduring fiscal year 2009 resulted in credit-related attrition that was higherthan historical levels.  This wasparticularly the case in certain of our larger markets, where LDCs do notguarantee our customer accounts receivable, such as our Georgia natural gas andTexas electricity markets, and in certain LDC-guaranteed markets, such as ourOhio, Michigan and Indiana natural gas markets. During fiscal year 2009, we also initiated aggressive actions todisconnect service to delinquent customers in all of our markets and to enhancecredit standards for all existing and prospective customers, which resulted inan increase in the number of potential new customers that were disqualified dueto credit quality concerns.**

** **

During the final sixmonths of the fiscal year ended June 30, 2008, natural gas commodityprices were increasing, and contract rates offered to our customers during thisperiod were highly competitive within many of our markets.  We experienced significant sales of newcustomer contracts, particularly for fixed rate and introductory variable rateproducts, during that period and into the first quarter of fiscal year2009.  During the first nine months offiscal year 2009 however, 

 

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commodity pricesdecreased significantly, and many of our customers migrated to current marketrates that are lower than their original fixed rates or their post-introductoryperiod variable rates with us.  Inaddition, for many of our markets during fiscal year 2009, we did not offer newcompetitive rates to customers who indicated their intention to terminate theircontract.  The result was higherin-contract attrition during fiscal year 2009 than that experienced in prioryears.

 

As of June 30, 2009,most of our current customers have been acquired organically throughdoor-to-door, telemarketing, direct mail and internet sales channels.  While customer attrition is a natural part ofour business, the marketing and customer care teams have focused efforts oncustomer retention via superior customer service and win back and loyalty initiatives.

 

We are focused on growingour customer base while controlling customer acquisition costs.  Our objective has been to maintain customeracquisition costs below 12 months of gross profit resulting in a pay backperiod of less than one year.

 

***Acquiring New Customers***

 

To acquire new customers,we employ an integrated marketing approach that consists of multiplecombinations of direct marketing, traditional and online media, publicrelations and local event participation. The goal is to have direct marketingefforts, which include telemarketing to both residential and small commercialcustomers, direct sales (outside sales focusing on small and mid-marketcommercial customers), and direct mail targeted to qualified residential andsmall commercial customers, all of which combined account for the majority ofour total tactical marketing mix.

 

**In order to conserve cash, wesignificantly reduced direct mail marketing, advertising and overall marketingexpenditures during fiscal year 2009, as compared to the prior fiscalyear.  We also scaled back our use ofcertain sales channels, which had a negative impact on brand awareness and newcustomer acquisitions during fiscal year 2009.**

** **

***Retaining and Winning Back Customers***

 

To retain existingcustomers, we rely on a team of highly trained internal and external customercare representatives.  Customersrequesting cancellation of service are provided information on the volatilityof natural gas rates and encouraged to retain the benefits of long-term rateprotection, if appropriate.  If wereceive notification from an LDC that a customer has cancelled or switched toanother supplier, attempts to communicate with those customers are made throughboth mail and phone, encouraging the customer to reconsider his or herdecision, reminding the customer of penalties he or she may incur and, in somecases, offering a new rate plan.

 

***Customer Renewals and Attrition***

 

Customer renewal andin-contract attrition percentages are summarized in the following table.

 
| ** **                            | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                  |       |                                |       |   |   |   |   |
| Customer  renewal percentage (1)      | ** ** | **84.1**                            | **%**      | 84.9 | % | 89.8 | % |
| In-contract  attrition percentage (2) | ** ** | **34.0**                            |       | 19.7 |   | 25.6 |   |

 

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(1)          At the end of each customer contractterm, customer contracts in most of our markets are renewed upon notificationby the marketers unless the customer indicates otherwise.  Customer renewal percentages in the tablerepresent the percentage of customers who received such notification thatultimately continued their relationship with us.

(2)          In-contract customer attrition percentageis defined as: (1) the percentage of loss of fixed rate customers beforetheir contract term officially expires; and (2) the percentage of loss ofany variable rate customers, whose contracts generally do not have expirationdates.

 

The customer renewal percentagefor the fiscal year ended June 30, 2008 includes the impact of a largemunicipal aggregation of customers that did not renew its contract with us atthe end of its contract term due to regulatory changes in the Ohio market.  Excluding this impact, the customer renewalpercentage was approximately 87.9% for the fiscal year ended June 30,2008.

 

**Higher in-contract attrition duringfiscal year 2009 resulted from several factors:**

** **

**·**                  The loss of any variable rate customer is includedis the in-contract attrition rate. Therefore, as the percentage of our variable rate customers increasedfrom 40% at June 30, 2008 to 55% at June 30, 2009, the in-contractattrition rate rose as well.

**·**                  Deteriorating economic conditions during fiscal year2009 resulted in credit-related attrition that was higher than historicallevels.  This was particularly the casein certain of our larger markets, where LDCs do not guarantee our customeraccounts receivable, such as our Georgia natural gas and Texas electricitymarkets, and in certain LDC-

** **

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**guaranteed markets, such as ourOhio, Michigan and Indiana natural gas markets. During fiscal year 2009, we initiated aggressive actions to disconnectservice to delinquent customers in all of our markets and to enhance creditstandards for all existing and prospective customers.  Credit-related attrition was particularlyhigh in Georgia, partially due to expected credit quality issues within theportfolio of customers that we acquired from Catalyst Natural Gas LLC (“Catalyst”)in October 2008.  Our enhancedcredit standards also resulted in an increase in the number of potential newcustomers that were disqualified due to credit quality concerns.**

** **

·                  During the final six months of the fiscalyear ended June 30, 2008, natural gas commodity prices were increasing,and contract rates offered to our customers during this period were highlycompetitive in many of our markets.  Weexperienced significant sales of new customer contracts, particularly for fixedrate and introductory variable rate products, during that period and into thefirst quarter of fiscal year 2009. During the first nine months of fiscal year 2009 however, commodityprices decreased significantly, and many of our customers migrated to currentmarket rates that were lower than their original fixed rates or theirpost-introductory period variable rates with us.  In addition, for many of our markets duringfiscal year 2009, we did not offer new competitive rates to customers in manyof our markets who indicated their intention to terminate their contract.  The result was higher in-contract attritionduring fiscal year 2009.

 

**·**                  Volatility in natural gas prices negatively impactedour liquidity position, which resulted in amendments to the Revolving CreditFacility that placed formal constraints on the term and type of contracts thatwe could offer to our customers.  Assuch, our ability to offer long-term fixed rate products to customers wasseverely limited.  Additionally, whencustomers informed us of their intent to terminate their contract before itstermination date, our options for offering new contracts were limited, whichcontributed to attrition.

** **

Attrition data iscalculated 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 in RCEs in any of our markets does not necessarily correlate directlywith customer attrition.

 

**CustomerContract Concentrations**

 

We provide customers witha choice of natural gas and electricity products with alternative pricestructures that are designed to manage the risks of energy pricevolatility.  The two basic alternativeprice structures are variable market-based pricing and fixed price forward contracts.  Pricing and terms for these products aredeveloped so that at any given time, potential customers can choose the productto meet their household or business needs.  We attempt to be flexible and to respond quickly to market conditions toensure that our products match consumer interests.  Unlike competitors offering one productchoice at a time, we simultaneously provide multiple product offerings.  We also attempt to keep our product offeringssimple in order to facilitate marketing to residential and small commercialcustomers.

 

As of June 30, 2009and 2008, approximately 45% and 60%, respectively, of our natural gas customerportfolio had fixed rate contracts while the remaining 55% and 40%,respectively, had variable rate contracts. 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 gascommodity purchases required to meet expected customer demand for all accountsserved under fixed price contracts.  Wealso have a natural gas hedging facility that limits our exposure tomark-to-market margin payments.  As of June 30,2009, contracts with our fixed price natural gas customers have an averageremaining life of approximately 9 months.

 

As of June 30, 2009and 2008, approximately 36% of our electricity customer portfolio had fixedrate contracts while the remaining 64% had variable rate contracts.  Our objective is to hedge 100% of anticipatedelectricity commodity purchases required to meet expected customer demand foraccounts served under fixed rate electricity contracts.   As of June 30, 2009, contracts with ourfixed price electricity customers have an average remaining life ofapproximately 11 months.

 

**MarketConcentrations**

 

***Geographic Concentrations***

 

We believe that our diversified geographical coverageprovides several benefits to us, including flexibility in product offerings andmarketing campaigns, a broad demographic mix and diversified credit andregulatory exposure.  Our multi-stateapproach allows us to:

 

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·                  benefit from a diverse geographic streamof sales;

·                  lower the delivery risk associated withdaily balancing gas markets;

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

·                  achieve scalability from knowledge ofmultiple LDC programs and procedures;

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

·                  lower the risk of extreme regionalweather patterns;

·                  lower the risk of material impact fromregional economic downturns;

·                  improve inventory managementopportunities across a diverse natural gas transportation and storageinfrastructure; and

·                  capitalize on our regional supply andpricing knowledge.

*** ***

***Guaranteed and Non-Guaranteed Market Concentrations***

 

Within ten of the marketsthat we serve, we are exposed to direct credit risk associated with customeraccounts receivable in markets where such receivables are not guaranteed byLDCs.  For fiscal years 2009 and 2008,55% and 56%, respectively, of our total sales of natural gas and electricitywere within markets where LDCs do not guarantee customer accountsreceivable.  We refer to these markets as“non-guaranteed” markets.  We maintain anallowance for doubtful accounts, which represents our estimate of potentialcredit losses associated with accounts receivables from customers withinnon-guaranteed markets.  We assess theadequacy of the allowance for doubtful accounts through review of the aging ofcustomer accounts receivable and general economic conditions in the marketsthat we serve.

 

Within twenty-nine of themarkets that we serve, we operate under a purchase of receivables programwhereby all billed receivables are purchased by the LDC.  We refer to these markets as “guaranteed”markets.  For fiscal years 2009 and 2008,45% and 44%, respectively, of our total sales of natural gas and electricitywere within markets where LDCs guarantee customer accounts receivable at aweighted average discount rate of approximately 1%.  Such discount is the cost of service to guaranteethe customer accounts receivable.  Withinthese markets, we are exposed only to the credit risk of the LDC, rather thanthat of our customers.  We monitor thecredit ratings of LDCs and the parent companies of LDCs that guarantee customeraccounts receivable.  We alsoperiodically review payment history and financial information for LDCs toensure that we identify and respond to any deteriorating trends.  As of June 30, 2009, all of our customeraccounts receivable in LDC-guaranteed markets was with LDCs with investmentgrade credit ratings.

 

Duringthe second half of fiscal year 2009, two LDCs in New York that previously didnot guarantee our customer accounts receivable began guaranteeing suchreceivables.  Recent legislation inMassachusetts will also require electricity LDCs to guarantee the accountsreceivable of retail suppliers, although the time frame for this implementationis currently unknown.  Newly approvedregulations in Maryland require natural gas and electricity utilities to eitherguarantee supplier receivables or improve the way customer payments areallocated to suppliers.  We anticipatethat the two natural gas markets in Maryland where we currently operate willbegin guaranteeing suppliers’ receivables during calendar year 2010.

 

Theseactions by regulators and LDCs to guarantee customer accounts receivable areexpected to improve the collectability of customer accounts receivable in ourexisting markets and should make entry into certain new markets moreattractive.

 

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***GeographicMarket Concentrations***

 

RCEs by geographic areaas of the end of the fiscal years ended June 30, 2009, 2008 and 2007 aresummarized in the following table.

 
| ** **                                               | ** **   | **RCEs  at June 30,** | ** **   |
|----------------------------------------------------------|--------------|----------------------------|--------------|
| ** **                                               | ** **   | **2009**                   | ** **   | **2008** | ** ** | **2007** | ** ** |
| ** **                                               | ** **   |                       |         | **%** |   |   |   | **%** |   |   |   | **%** |   |
| ** **                                               | ** **   | ** **                 | ** **   | **of** | ** ** | ** ** | ** ** | **of** | ** ** | ** ** | ** ** | **of** | ** ** |
| ** **                                               | ** **   | **No.**                    | ** **   | **Total** | ** ** | **No.** | ** ** | **Total** | ** ** | **No.** | ** ** | **Total** | ** ** |
| ** **                                               | ** **   | ** **                 | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Southern U.S.**(1):                                    |         |                       |         |   |   |   |   |   |   |   |   |   |   |
| Natural gas                                              | ** **   | **197,000**                |         |   |   | 241,000 | ** ** | ** ** | ** ** | 209,000 | ** ** | ** ** | ** ** |
| Electricity                                              | ** **   | **25,000**                 |         |   |   | 25,000 | ** ** | ** ** | ** ** | 12,000 | ** ** | ** ** | ** ** |
| ** **                                               | ** **   | **222,000**                |         | **40** | **%** | 266,000 |   | 38 | % | 221,000 |   | 35 | % |
| **Northeastern U.S., Mid-Atlantic U.S. and Canada** (2): |         |                       |         |   |   |   |   |   |   |   |   |   |   |
| Natural gas                                              | ** **   | **138,000**                |         |   |   | 156,000 | ** ** | ** ** | ** ** | 139,000 | ** ** | ** ** | ** ** |
| Electricity                                              | ** **   | **50,000**                 |         |   |   | 73,000 | ** ** | ** ** | ** ** | 31,000 | ** ** | ** ** | ** ** |
| ** **                                               | ** **   | **188,000**                |         | **33** | **%** | 229,000 |   | 33 | % | 170,000 |   | 27 | % |
| **Midwestern U.S.**(3):                                  | *** *** | *** ***               | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Natural gas                                              | ** **   | **152,000**                |         |   |   | 205,000 | ** ** | ** ** | ** ** | 240,000 | ** ** | ** ** | ** ** |
| Electricity                                              | ** **   | **—**                 |         |   |   | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** |
| ** **                                               | ** **   | **152,000**                |         | **27** | **%** | 205,000 |   | 29 | % | 240,000 |   | 38 | % |
| **Total RCEs:**                                          | ** **   | ** **                 | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Natural gas                                              | ** **   | **487,000**                |         |   |   | 602,000 | ** ** | ** ** | ** ** | 588,000 | ** ** | ** ** | ** ** |
| Electricity                                              | ** **   | **75,000**                 |         |   |   | 98,000 | ** ** | ** ** | ** ** | 43,000 | ** ** | ** ** | ** ** |
| Total                                                    | ** **   | **562,000**                | ** **   | **100** | **%** | 700,000 |   | 100 | % | 631,000 |   | 100 | % |

 

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(1)          Includes markets in Georgia, Texas andFlorida.

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

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

 

Our business platform ispartly based on providing long-term, fixed rate price protection in contrast tovariable rates offered by LDCs against which we compete in the markets that weserve.  For the majority of fiscal year2009, our financial and liquidity restrictions limited new and renewed contractterms to 12 months or less.  Therefore,we were unable to fulfill consumer demand for longer-term products, losinggrowth and renewal opportunity to LDCs and competitors in many of our markets.

 

***Southern U.S. markets —***Total RCEs in our southern markets decreased 17%during fiscal year 2009, mainly due to a decrease in MXenergy’s customer basein the Georgia natural gas market. In addition to the impact of liquidityconstraints in Georgia, customer account terminations were also unusually highdue to bad debt experience attributed to economic conditions, and to morestringent credit standards initiated during the year for new customeraccounts.  Liquidity and contract termlimitations also impacted growth and renewals in our Texas electricity market.

 

***Northeastern U.S., Mid-Atlantic U.S. and Canadian markets —***Total RCEs within these regions decreased18% during fiscal year 2009, primarily driven by lower customer counts in ourNew York and Connecticut electricity markets. In addition to the impact of liquidity constraints, we were unable tosustain competitive offers due partly to term and pricing restrictions imposedon us by amendments to the Revolving Credit Facility.  A sizeable increase in the number of newretail marketers in New York, New Jersey and Connecticut offering highercommissions to contracted direct marketing personnel adversely impacted directsales recruitment efforts.

 

TwoLDCs in New York that previously did not guarantee customer accounts receivablebegan guaranteeing such receivables during fiscal year 2009, lowering ourcredit risk in those markets.

 

Recentlegislation in Massachusetts will require electricity LDCs to guarantee theaccounts receivable of retail suppliers, although the time frame for thisimplementation is currently unknown. Newly approved regulations in Maryland will require natural gas andelectricity utilities to either guarantee supplier receivables or improve theway customer payments are allocated to suppliers.  It is anticipated that these changes will beimplemented during calendar year 2010. New initiatives that will increase the attractiveness of certain Pennsylvaniaelectricity and natural gas markets will begin taking effect early in 2010.

 

***Midwestern U.S. markets —***Total RCEs in this region decreased 26%during fiscal year 2009.  Lower customercounts can be attributed to competitive pressure and sales and marketingbudgetary constraints.  Recent retailauction activity in Ohio resulted in extremely favorable LDC pricing, limitinggrowth potential and increasing attrition for retail marketers.  The 

 

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Company’s contract termlimitations also significantly impacted growth opportunities in the Michiganmarket.

 

***Potentialmarket growth —***For fiscal year 2010, we will explore expansion into other LDC markets that areopen to competition and appear to provide attractive growth potential.  Rapid market entry can be realized withminimal business disruption by leveraging our existing IT infrastructure andoperational platforms, and our existing sales channels.  We continue to monitor existing and newmarket opportunities.  The decision toenter into new LDC territories will continue to be governed by several factors,including:

 

·                  compatibility with our existing operatingsystems and supply base;

·                  attractiveness of LDC program rules, suchas billing 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.

 

In September 2008,we received our certificate of qualification to conduct business in the Stateof California.  We are currentlyevaluating the feasibility of entering this market.

 

**Acquisitions**

 

In addition to organicgrowth, we have historically followed a disciplined acquisition strategy,acquiring only businesses that meet certain criteria, including the following:

 

·                 the acquired operations must beconsistent with our business objectives to build a profitable retail business;

·                 the customers of the acquired companymust have been acquired by such company in a manner consistent with ourmarketing principles and values and in accordance with applicable laws andregulations;

·                 the operations of the acquired companycan be integrated with existing internal systems and processes;

·                 the acquired customers are located inmarkets that facilitate risk management through transparent pricing, liquidinstruments, and diversity of credit-worthy suppliers; and

·                 the acquisition can be comfortablysupported by our financing capabilities.

 

Some of the companies weacquired were located in markets not previously served by us and therefore,provided us with new strategic marketing opportunities.  We intend to continue this strategy whenevaluating new acquisition opportunities.

 

Since 2005, we havecompleted the following acquisitions:

 
| **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.          |       | 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                                       |

 

**MarketDeregulation and Competition**

 

In markets that are opento competitive choice of retail energy suppliers, our primary competition comesfrom utility-affiliated retail marketers, small to mid-size independent retailenergy companies and default service with the incumbent utility. Competition isbased primarily on product offerings, price and customer service.

 

Increasing our marketshare depends in part on our ability to convince customers to switch to ourservice.  The local utilities and theiraffiliates 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 critical economicinterest in the outcome of proceedings concerning their revenues and terms andconditions of service.  The incumbents’advantages in many markets are intended to be limited, however, by regulatorystructures that, for example, prohibit incumbents from offering non-standardservice and pricing structures, minimize the opportunity for the regulatedbusiness to subsidize the unregulated business and limit the ability of theutilities 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.

 

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In many cases, LDCsactively support deregulation and have welcomed the entry of retail energymarketers.  Historically, regulated LDCsdid not profit from commodity supplied to customers; rather, their rate ofreturn was based on their hard assets or “rate base.” Accordingly, LDCs chargedconsumers for commodity on a pass-through basis, and did not hedge theirforward energy costs.  By relieving LDCsof the need to engage in risk management, regulations permitting retail competitionallows LDCs to focus on their core competency of local distribution, whichtypically constitutes a significant portion of most customers’ utilitybills.  Many LDCs assume customer baddebt exposure since this encourages more market entrants and supports continuedderegulation. LDCs may recover the bad debt expense as part of their tariffrates.  The interests of retail energymarketers and most LDCs are thus highly aligned, providing crucial support forcontinued deregulation, while increasing penetration of the retail energy marketermodel.  We have successfully forgedstrong relationships with many of the LDCs throughout our service territories.

 

Some of our competitors,including local utilities, have formed alliances and joint ventures in order tocompete in the restructured retail electricity and natural gas industries.  Many customers of these local utilities maydecide to stay with their longtime energy provider if they have been satisfiedwith their service in the past. Therefore, it may be difficult for us to compete against local utilitiesand their affiliates.

 

***Deregulated Natural Gas Industry***

 

The Natural Gas PolicyAct of 1978 took the first steps toward deregulating the natural gas market byinstituting a scheme for the gradual removal of price ceilings at the wellhead.  In 1985, the Federal Energy RegulatoryCommission (“FERC”) issued Order 436, which changed how interstate pipelineswere regulated.  Essentially, this orderallowed pipelines, on a voluntary basis, to offer transportation services tocustomers who requested them on a first-come, first-serve basis.  The movement towards allowing pipelinecustomers a choice in the purchase of their natural gas and transportationarrangements became known as “open access,” and spurred the emergence ofnatural gas marketers.

 

While large commercialand industrial consumers have had the option of purchasing the natural gascommodity separately from natural gas suppliers for many years, stateregulators and law makers have moved more slowly in implementing choiceprograms for residential and small-volume commercial customers.

 

According to the UnitedStates Energy Information Agency (“EIA”), as of December 2008, twenty-onestates and the District of Columbia have legislation or programs in place thatlet residential consumers and other small-volume users purchase natural gasfrom someone other than their traditional utility company.  As of December 2008, of theapproximately 64.4 million total residential natural gas customers in the U.S.,nearly 34.9 million have access to choice programs, with approximately 4.7million (or 13.5% of eligible customers) actually purchasing from residentialmarketers.  State regulators continue torefine and evaluate existing programs in order to promote a competitivemarketplace.  The low penetration rate,coupled with the desire for a competitive marketplace, has created attractivegrowth opportunities for residential marketers such as us.

 

***Deregulated Electricity Industry***

 

In 1978, Congress passedthe Public Utility Regulatory Policies Act which laid the groundwork forderegulation and competition by opening wholesale power markets to non-utilityproducers of electricity.  In 1996, FERCOrders 888 and 889 required open and equal access to jurisdictional utilities’transmission lines for all electricity producers, thus facilitating the states’restructuring of the electric power industry by allowing customers directaccess to retail power generation.

 

As a result of federaland state initiatives, the electric power industry in several states has changedfrom a structure characterized by highly regulated, vertically integrated localmonopolies, which provide their customers with a comprehensive package ofelectricity services, to a deregulated structure.  The deregulated structure includes independentpower producers and unregulated owners of electricity generation, competitiveproviders like us who supply electricity to end-use customers, and utilitiesthat continue to provide transmission or distribution services as commoncarriers.  According to the EIA, as of2008, there are 14 states (Connecticut, Delaware, Illinois, Maine, Maryland,Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio,Pennsylvania, Rhode Island, and Texas) and the District of Columbia thatoperate retail markets in which customers may choose alternative electricitysuppliers.

 

***Competition***

 

We focus on markets thatare less susceptible to competitive pressures on profit margins and that lendthemselves to mass-market techniques.  Asof December 31, 2008, there were approximately 99 licensed and activenatural gas marketers serving customers in deregulated states throughout thecountry.  Marketers competing for thecommercial and residential markets fall 

 

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into three categories:utility affiliates, 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.

 

The number of activecompetitive retail marketers ranges from 2 to 13 in most of the states that weserve, with as many as 50 in New York. In addition to all local utilities, we consider our main retailcompetitors in natural gas to be Georgia Natural Gas, Direct Energy (anaffiliate of UK based Centrica), Gas South, Vectren Source, IDT Energy,Dominion Retail Energy (a deregulated affiliate of Dominion Resources, Inc.),Just Energy and Interstate Gas Services. For electricity, our primary retail competitors are ConEd Solutions,Direct Energy, Hudson Energy, StarTex Power, TXU Energy, Reliant Energy,Champion Energy Services and Dominion Retail Energy.

 

**Seasonality of Operations**

 

Weather conditions have asignificant impact on customer demand and on the price of natural gas andelectricity.  Customer demand exposes usto a high degree of seasonality in sales, cost of sales, billings to customers,cash collections from customers, inventory requirements and cash flows.  In addition, customers who choose to be onbudget billing programs and LDC payment terms can cause timing differencesbetween the billing and collection of accounts receivable and the recording ofrevenues.

 

We utilize a considerableamount of cash from operations to fund customer accounts receivable, naturalgas inventory purchases and other working capital requirements during themonths of November through April of each fiscal year.  The majority of natural gas consumptionoccurs during the months of November through March with collectionson accounts receivable peaking in the spring. In contrast, electricity consumption peaks during the summer months of June throughSeptember with collections on accounts receivable peaking in late summer.

 

The impact of rapidlyrising or falling commodity prices also varies greatly depending on the periodof time in which they occur during our fiscal year.  Although operating results for an entirefiscal year may not be materially impacted by such trends due to our commodityhedging and contract pricing strategies, commodity price movements can havematerial short-term impacts on monthly and quarterly operating results, whichshould be considered in the context of our entire annual operating cycle.

 

**CommoditySupply and Pricing Risk Management**

 

***Natural Gas Supply***

 

Prior to September 22,2009, we purchased natural gas supply and managed transportation logisticsinternally.  Historically, we purchasedphysical supply from more than 50 natural gas producers, marketers, and energytrading firms in either a producing region or at delivery points.  We periodically adjusted our portfolio ofpurchase/sales contracts, storage and transportation capacity based uponcontinual analysis of our forecasted load requirements, and determined whetherit will be more economical to utilize natural gas from storage or to purchasefrom the spot market, with consideration given to transportation costs andavailability.  Natural gas was deliveredto the LDC city-gate or other specified delivery points where the LDC tookcontrol of the natural gas and delivered it to individual customers’ locationsof use, utilizing its extensive network of small diameter distribution pipe.

 

Effective September 22,2009, under the Commodity Supply Facility, we purchase natural gas supply from RBSSempra, as our exclusive natural gas supplier. RBS Sempra will also manage our interstate pipeline and storagefacilities, and will be responsible for delivery of natural gas to LDCcity-gates, as directed by us.

 

LDCs provide ancillaryservices such as billing, meter reading and balancing services.  Because of this extensive transportationinfrastructure and the services provided, LDC costs typically make up asignificant portion of the end user’s utility bill.

 

***Electricity Supply***

 

Prior to September 22,2009, we purchased physical electricity supply from the respective independentsystem operator (“ISO”), for all our power customers in New York, Connecticutand Massachusetts.  In Texas, wepurchased physical electricity directly from various counterparties fordelivery to the Electric Reliability Council of Texas (“ERCOT”) based on pricesestablished by the regional transmission organization (“RTO”).

 

Effective September 22,2009, under the Commodity Supply Facility, we purchase electricity from RBS Sempra,as our exclusive

 

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electricity supplier.

 

***Commodity Pricing Risk Management***

 

We have a risk managementpolicy that is intended to reduce our financial exposure to changes in theprices of natural gas and electricity. Under this policy, the Company hedges all anticipated natural gas and electricitycommodity purchases required to meet expected customer demand for all accountsserved under fixed price contracts.  Tomanage weather risk, we may hedge up to 110% in the winter months with respectto customer demand in certain natural gas utilities with daily balancingrequirements and up to 110% in the summer months with respect to customeron-peak demand in certain electricity utilities.  We also utilize options in order to mitigateboth weather and attrition risks.

 

We utilize both physical andderivative instruments to reduce our exposure to fluctuations in the prices ofnatural gas and electricity.  Natural gascommodity derivatives used as economic hedges typically have included swaps andoptions executed under our Hedge Facility. Electricity commodity derivatives used as economic hedges have beenexecuted with a select number of counterparties, including Sempra EnergyTrading Corp., Constellation Energy Commodities Group and BP NorthAmerica.  As of June 30, 2009, ourhedge positions extend through December 2011.

 

We utilize New YorkMercantile Exchange (“NYMEX”) referenced over-the-counter swaps, basis priceswaps and options to economically hedge the risk of variability in the cost ofnatural gas.  Refer to “Item 7A.Quantitative and Qualitative Disclosures About Market Risk”, for additionalcommentary regarding commodity price risk management.

 

**Foreign Operations**

 

Our principal foreignoperations are located in Canada. Foreign operations comprised less than 1% of our consolidated total assetsat June 30, 2009 and less than 1% of our consolidated sales of natural gasand electricity for the fiscal year ended June 30, 2009.

 

**Management Team and Employees**

 

The members of ourexecutive management team have extensive experience in energy risk managementand retail marketing as well as in creating, developing and managing businessesand risk on behalf of major international corporations.  The professional backgrounds of our executivemanagement team are described under “Item 10. Directors, Executive Officers and Corporate Governance.”

 

As of June 30, 2009,we had approximately 215 full-time equivalent employees in the United Statesand Canada.  None of our employees aresubject to a collective bargaining agreement, and we believe that our relationshipwith our employees is good.

 

**Committedand Knowledgeable Equity Ownership**

 

Our equity ownership haschanged as a result of the Restructuring consummated on September 22,2009.  Refer to Part III of thisAnnual Report for additional information.

 

As of June 30, 2009,our primary stockholders included Denham Commodity Partners Fund LP (“Denham”),Charterhouse Group Inc. (“Charterhouse”) and Greenhill Capital Partners (“GCP”).  These stockholders have made equityinvestments that have provided us with sufficient financial capital to grow andsupport our business.  In addition, thesestockholders have an in-depth understanding of the energy and financialmarkets, and provide strength and insight for our activities and strategy.

 

Denham (formerly known asSowood Commodity Partners Fund LP and before that, Lathi, LLC, a subsidiary ofHarvard Management Company Inc.) and its affiliated funds invest in assets andcompanies that provide goods and services in commodity markets, primarily inthe energy sector.  Denham made aninitial investment in us in February 2001. In addition to its equity investment, Denham has provided financing tous and also provides risk management advice and strategic planning.

 

Charterhouse is a NewYork-based, middle-market private equity investment firm with a focus onbuyouts, build-ups and growth capital financings.  Charterhouse made an initial investment in usin 2004.  Charterhouse invests in thebusiness services (including the energy services sub-sector), consumer, andhealthcare services sectors.  Establishedin 1973, Charterhouse has invested over $2 billion in equity capital in variouscompanies, including us.

 

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GCP is an affiliate ofGreenhill & Co., Inc. (“Greenhill”), an independent globalinvestment banking firm publicly traded on the New York Stock Exchange.  GCP manages several private equity fundswhich total approximately $1.8 billion in capital, focusing on the energy,financial services, for-profit education and telecommunicationsindustries.  Greenhill was founded in1996 and provides financial advisory and merchant banking fund managementservices through its offices in the U.S., Europe and Japan.

 

**EnvironmentalMatters**

 

We do not have physicalcustody or control of the natural gas provided to our customers, or anyfacilities used to produce or transport natural gas or electricity.  In addition, title to the natural gas sold toour customers is passed at the same point at which we accept title from ournatural gas suppliers.  Therefore, we donot believe we have significant exposure to legal claims or other liabilitiesassociated with environmental concerns.

 

**WhereYou Can Find More Information**

 

Our filings with the SECare available to the public over the Internet at the SEC’s website atwww.sec.gov.  You may also read and copyany document we file at the SEC’s public reference room located at 100 FStreet, 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.

 

The website atwww.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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**ITEM 1A.   RISK FACTORS**

 

Any of the followingrisks could have an adverse effect on our business, financial condition orresults of operations.  Additional risksor uncertainties not currently known to us may also arise in the future that couldhave an adverse effect on our business, financial condition or results ofoperations.

 

**RisksRelated to Our Business**

** **

**Our risk management policies and hedging proceduresmay not mitigate risk as planned, and we may fail to fully or effectively hedgeour commodity supply and price risk exposure against changes in consumptionvolumes or market rates.**

** **

To provide energy to our customers, we purchase therelevant commodity in the wholesale energy markets, which are often highlyvolatile.  It is our policy to match estimated consumption by ourcustomers by purchasing offsetting volumes of natural gas andelectricity.  To reduce our financial exposure related to commodity pricefluctuations and changes in consumption volumes, we routinely enter intocontracts to hedge our fixed price sale commitments, delivery requirements andinventory of natural gas, as well as fixed price sale commitments and line lossof electricity.

 

We have contractual obligations to many of ourcustomers to provide full requirements service and as a result, our hedgingprocedures require constant monitoring and adjustment. Failure to continue touse valid assumptions may lead to inappropriate hedging positions.  Inaddition, there are a number of factors that are beyond our control, such asrisk of loss from counterparties’ nonperformance, volumetric risks related tocustomer demand and seasonal fluctuations.  Although we try to 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 physicalsupplies.**

 

Although our fixed price contracts with residentialcustomers generally have terms of up to two years, those customers mayterminate their contracts at any time for a termination fee that, in mostcases, is relatively modest and does not bear any relation to our costs or lostprofit with respect to the remainder of the contract.  Most of our smalland mid-market commercial customers cannot terminate their fixed pricecontracts without triggering a damages provision designed to cover costsrelated to the termination of those contracts.  For larger commercialcustomers, we utilize various means to ensure that we recover our costs,including legal remedy if appropriate. We depend on our hedging strategies tocover the costs related to terminations by residential and small commercialcustomers.  To hedge effectively against terminations, we must, at theinception of the contracts, attempt to accurately forecast the number ofresidential and small commercial customers that will terminate their contractsprior to the end of their term.  If we experience a number ofcancellations greater than originally forecasted or if we are not able toreplace terminating customers with new customers, our financial results may benegatively impacted.  Conversely, ifforecasted attrition is higher than actual realized attrition, we are at riskfor having to source additional hedges or supply at potentially higher marketprices where no price increase can be passed on to customers through theduration of their contract terms.

 

**Most ofour financial swap agreements are settled against published index prices whichcould cease to be reliable or could become unavailable.**

 

We hedge our forward natural gas exposures through acombination of physical supply purchases and financial swap agreements. Financial swap agreements may be settled against monthly NYMEX settlementprices or against index prices published by various industrypublications.  NYMEX settlement prices could be affected by supply anddemand factors at the Henry Hub delivery point of the contract which are notpresent elsewhere in the country.  Accordingly, the NYMEX settlementprices may cease to accurately reflect the market price of natural gas. Likewise, index prices for market areas in which our customers are located, andwhich are contained in daily and monthly industry publications, are publishedbased on private polling of industry participants and therefore may bedistorted, deliberately or unintentionally, thereby ceasing to be an accurategauge of market pricing in those areas.

 

In the event either NYMEX settlement prices orpublished index prices were to become unavailable or cease to be reliable, weand our counterparties could seek to find a replacement price that would moreaccurately or reliably reflect the market prices that we are hedging. However, there is no certainty that such efforts would be successful.

 

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

 

We engage in price-risk management activities relatedto our natural gas and electricity purchases in order to economically hedge ourexposure to commodity price risk.  Through the use of financial derivativeand physical contracts, we attempt to balance our physical and financialpurchases and sales commitments.  We have not designated these derivativeinstruments as hedges for accounting purposes.  Therefore, changes in thefair value of these instruments are recognized immediately in earnings. As a result of this accounting treatment, changes in the forward prices ofnatural gas and electricity cause volatility in our quarterly and annual earnings,which we are unable to fully anticipate.

 

**We maynot have sufficient liquidity or credit capacity to hedge market risks, tocontinue to grow our business, or to operate effectively.**

 

Our contractual agreements with certain LDCs requireus to maintain restricted cash balances or letters of credit as collateral forthe performance risk associated with the future delivery of natural gas. These collateral requirements may increase as we grow our customer base. Additionally, we must post letters of credit with our natural gas andelectricity supply providers, the aggregate value of which could fluctuatebased on the volume or cost of the commodity purchased in any givenmonth.  Significant movements in market prices also can result influctuations in the collateral required.  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.  Suchliquidity requirements may be greater than we anticipate or are able to meet.

 

**Despiteour efforts to hedge risk and accurately forecast demand, our financial resultsare susceptible to changing weather conditions and commodity price fluctuationsand therefore will fluctuate on a seasonal and quarterly basis.**

 

Our overall operating results fluctuate substantiallyon a seasonal basis, and the pattern of this fluctuation may change dependingon: (1) the geographic mix of our customer base; (2) the terms of anycontract to which we become a party; (3) weather conditions, whichdirectly influence the demand for electricity and natural gas and affect theprices of energy commodities; and (4) variability in market prices fornatural gas and electricity.

 

Generally, demand for electricity peaks in the summerand demand for natural gas peaks in the winter.  Recent growth in naturalgas-fired electric generation has introduced a secondary peak for natural gasin the summer.  Typically, when winters are warmer than expected andsummers are cooler than expected, demand for energy is lower, resulting in lessnatural gas and electricity consumption than forecasted.  Likewise, whenwinters are colder or summers are warmer than expected, consumption may begreater than we have hedged and greater than we are able to meet with storageor swing supply. Depending on prevailing market prices for electricity and gas,these and other unexpected conditions may reduce our sales or increase ourcosts and negatively impact our results of operations.  We may experiencelower consumption volumes, and therefore, lower sales. We may experience lossesfrom the purchase of additional volumes at higher prices or the sale of excessvolumes at prices below our acquisition cost.  Our failure to anticipatechanging weather demands or to effectively manage our supply in response tochanging demands could negatively impact our financial results.

 

The impact of rapidly rising or falling commodityprices also varies greatly depending on the period of time that they occurwithin our fiscal year.  Although operating results for a full fiscal yearmay not be materially impacted by such trends due to our commodity hedging andcontract pricing strategies, they can have material short-term impacts on monthlyand quarterly operating results, which may be misleading when consideredoutside of the context of our annual operating cycle.

 

Large fluctuations in the market price of natural gasand electricity within short periods of time also may have a negative impact onthe availability of credit necessary 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 direct credit risk related to our customers located in Georgia,Texas and Florida, and for our mid-market commercial customers located in NewYork, New Jersey and Ohio.  This group of customers representedapproximately 55% of our sales of natural gas and electricity during the fiscalyear ended June 30, 2009.  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 electric or gas service.  Even if we terminate service tocustomers who fail to pay their utility bill, we remain liable to our suppliersof electricity and natural gas for the cost of those commodities. Furthermore, in the Georgia and Texas markets, we are responsible for billingthe distribution charges for the local utility and are at risk for thesecharges, in addition to the cost of the commodity, in the event customers failto pay their bills.  Changing economic factors, such as

 

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rising unemployment rates and energy prices also result in a higher riskof customers being unable to pay their bills when due.

 

The failure of our customers to pay theirbills or our failure to maintain adequate billing and collection procedurescould adversely affect our results of operations or financial condition.

 

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

 

In certain markets, werely on the utilities to guarantee customer accounts receivable and to performtimely and accurate billing.  Theseguaranteed markets represented approximately 45% of our sales of natural gasand electricity during the fiscal year ended June 30, 2009. As ourbusiness grows, the proportion of customers we serve that are billed byutilities could increase.  The bankruptcyof a utility could result in a default in such utility’s payment obligations tous.

 

In addition, LDCs that provide billing services and guarantee customeraccounts receivable rely on us for accurate and timely communication ofcontract rates and other information necessary for accurate billing tocustomers.  The number of territories within which we provide natural gasand electricity supply poses a constant challenge that demands considerablemanagement, personnel and information system resources.  Each territoryrequires unique and often varied electronic data interface systems.  Rules thatgovern the exchange of data may be changed 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 datato LDCs on a timely 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.**

 

Retail energy marketers are responsible for providingadequate natural gas to LDCs and electricity to independent system operators (“ISOs”)for ultimate delivery to customers.  Commodity amounts provided aregenerally based on estimates of customer usage over a prescribed period. Imbalances occur when amounts delivered to an LDC (for natural gas) or an ISO(for electricity) exceed actual customer usage (resulting in a receivable fromthe LDC or ISO) or when amounts consumed by customers exceed amounts deliveredto an LDC or an ISO (resulting in a payable to the LDC or ISO).  CertainLDCs and ISOs rely on collection of imbalances payable to them in order tosettle imbalances payable by them to retail marketers.  If retailmarketers default on their obligations to settle an imbalance owing to an LDCor an ISO, such LDC or ISO may not have adequate resources to satisfy itsobligation to settle imbalances owing to marketers.  Therefore, the inabilityof an LDC or an ISO to collect imbalance amounts from other retail energymarketers may hinder our ability to collect imbalance amounts owed to us bysuch an LDC or ISO.

 

**We depend on the accuracyof data in our billing systems.  Inaccurate data could have a negativeimpact on our results of operations, financial condition, cash flows andreputation with customers and/or regulators.**

 

We depend on the accuracy and timeliness of customer billing,collections and consumption information in our information systems.  Werely on many internal and external sources for this information, including:

 

·                  our internal marketing,pricing and customer operations functions;

·                  LDCs and ISOs with which wehave 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 be outside of our directcontrol, could result in:

 

·                  inaccurate and/or untimelybills sent to customers;

·                  inaccurate accounting andreporting of customer revenues, gross profit and accounts receivable activity;

·                  customer complaints; and

·                  increased regulatory scrutiny.

 

**The Commodity Supply Facility is an exclusivearrangement to purchase natural gas from a single supplier.  The lack of competitive suppliers couldresult in higher commodity supply prices for us.**

 

Prior to the consummationof the Restructuring, we purchased natural gas from more than 50 natural gasproducers, marketers and energy trading firms in either a producing region orat delivery points.  These numeroussuppliers ensured a competitive pricing environment in which we could seek thelowest possible price for our business. Effective September 22, 2009, we are required to purchase a minimumamount of natural gas annually from RBS Sempra under an exclusive supply 

 

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arrangement.  As a result, competitive bidding betweenpotential suppliers may be reduced, which may result in higher commodity costsand lower gross profit per MMBtu sold to our customers.

 

**In connection with the Commodity Supply Facility, RBSSempra currently manages the scheduling of natural gas deliveries to LDCs,transportation logistics and storage capacity that we formally managedinternally.  As a result, we have lessdirect control over storage and delivery of natural gas to LDCs, which couldresult in lower reliability for deliveries to customers**

 

Prior to the consummationof the Restructuring, we managed gas supply, storage capacity andtransportation logistics internally.  Wehave well-trained management and staff who have developed strong expertise andeffective working relationships related to these functions.  Effective September 22, 2009, RBS Sempranow manages these functions in connection with the Commodity SupplyFacility.  If RBS Sempra fails to effectively managethese functions, or to appropriately utilize our expertise, deliveries ofnatural gas to LDCs, and ultimately to our customers, could become lessreliable, which could have a negative impact on our reputation and results ofoperations.

 

**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 transportationand transmission facilities owned and operated by utilities and other energycompanies to deliver the electricity and natural gas we sell tocustomers.  Under the regulatory structures adopted in most jurisdictions,we are required to enter into agreements with local incumbent utilities for useof the local distribution systems and to establish functional data interfacesnecessary to serve our customers.  Any delay in the negotiation of suchagreements or inability to enter into reasonable agreements could delay ornegatively impact our ability to serve customers in those jurisdictions, whichcould have an adverse impact on our business, results of operations, andfinancial condition.

 

We also depend on localutilities for maintenance of the infrastructure through which we deliverelectricity and natural gas to our customers.  We are unable to controlthe level of service the utilities provide to our customers.  Anyinfrastructure failure that interrupts or impairs delivery of electricity ornatural gas to our customers could cause customer dissatisfaction, which couldadversely affect our business.  Iftransportation or transmission is disrupted, or if transportation ortransmission capacity is inadequate, our ability to sell and deliver productsmay be hindered.  Such disruptions could also hinder our providingelectricity or natural gas to our customers and adversely impact our riskmanagement policies, hedge contracts and financial results and condition.

 

Regulations in many marketsrequire that meter reading and the billing and collection processes be retainedby the local utility.  In those states, we also are required to rely onthe local utility to provide us with our customers’ information regardingenergy usage.  Our inability to confirm information received from theutilities could negatively impact our reputation with customers and, therefore,our sales and results of operations.

 

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

 

While there are barriers toentry, we operate only in markets that are open to alternate energy suppliers.Competition is based primarily on product offering, price and customerservice.  We generally face competition in those markets fromutility-affiliated retail marketers and small to mid-size independent retailenergy companies.  Some of these competitors or potential competitors maybe larger and better capitalized than we are.

 

Increasing our market sharedepends in part on our ability to convince customers to switch to our service.The local utilities have the advantage of long-standing relationships withtheir customers, longer operating histories, greater financial strength andgreater name recognition than we do. In addition, customers may be lessfamiliar with the fixed price product that we offer, and we may not besuccessful in educating potential customers about the benefits of fixed priceenergy supply nor of the other products we offer. Convincing customers toswitch to a new company for the supply of a critical commodity such aselectricity or natural gas is a challenge. If our marketing strategy is notsuccessful, our business, results of operations and financial condition will beadversely affected.

 

In addition, our marketingefforts may be hindered in a market where our offers are less competitiverelative to price offerings of the utilities or other marketers. Utilitieshistorically react more slowly to changing commodity prices, whereas ourproducts generally reflect the prevailing market prices. These factors mayresult in less effective marketing or 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**

 

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**altered, reversed, discontinued or delayed, our business prospects andfinancial results could be materially adversely affected.**

 

The regulatory environmentapplicable to the electric and gas LDC distribution systems has undergonesubstantial change over the past several years as a result of restructuringinitiatives at both the state and federal levels.  We have targeted thederegulated segments of the electric and gas markets created by theseinitiatives.  Regulations may be revised or reinterpreted or new laws andregulations may be adopted or become applicable to us or our operations. Such changes may have a detrimental impact on our business.

 

In certain deregulatedelectricity markets, proposals have been made by governmental agencies and/orother interested parties to re-regulate areas of these markets.  Otherproposals to re-regulate may be made and legislated or other attention to theelectric and gas restructuring process may delay or reverse the deregulationprocess or interfere with our ability to do business. If competitiverestructuring of electric and gas markets is altered, reversed, discontinued ordelayed, our business prospects and financial results could be negativelyimpacted.

 

**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 toassess new product offerings, apply new technologies for our businessdevelopment and make investments in acquisitions of complementarycompanies.  If we buy a company or business, we may experience difficultyintegrating that company’s personnel and operations, or key personnel of theacquired company may decide not to work for us.  Furthermore, if weacquire the residential or small commercial businesses of an incumbent utilityor other energy provider in a particular market, the customers of that entitymay not be under any obligation to use our services.  If we make othertypes of acquisitions, we may experience difficulty in assimilating theacquired technology or products into our operations or informationsystems.  These difficulties could disrupt our ongoing business, distractour management and employees, and increase our expenses.

 

Among other things, thegrowth of our operations will depend upon our ability to expand our customerbase in our existing markets and to enter new markets in a timely manner atreasonable costs.  We anticipate that our employee base will grow toaccommodate our increased customer base.  As we expand our operations, wemay encounter difficulties integrating new customers and employees as well asany legacy systems of acquired entities.  We also may experiencedifficulty managing the growth of a portfolio of customers that is diverse withrespect to the types of service offerings, applicable market rules and theinfrastructure for product delivery.

 

Expanding our operationscould result in increased liquidity needs to support working capital, for thepurchase of natural gas and electricity supply to meet our customers’ needs,for the credit requirements of forward physical supply and for generally higheroperating expenses.  The Commodity Supply Facility may not be adequate tomeet these higher liquidity requirements.

 

Expanding our operationsalso may require continued development of our operating and financial controlsand may place additional stress on our management and operationalresources.  If we are unable to manage our growth and developmentsuccessfully, our operating results, financial condition and internal controlsover financial reporting could be adversely affected.

 

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

 

We depend on the continuedemployment and performance of key management personnel.  A number of oursenior executives have substantial experience in consumer and energy marketsthat have undergone regulatory restructuring and have extensive risk managementand hedging expertise.  We believe their experience is important to ourcontinued success.  If our key executives do not continue in their presentroles and are not adequately replaced, our business operations could beadversely affected.  In addition, failure to retain or adequately replaceour chief executive officer or chief financial officer could give rise to adefault under the Commodity Supply Facility.

 

**We rely on a capable, well-trained workforce to operate effectively. Retention of employees with strong industry or operational knowledge isessential to our ongoing success.**

 

Many of the employeepositions within our customer operations, information systems, pricing,marketing, risk management and finance functions require extensive industry,operational or financial experience that may not be easily replaced if anemployee were to leave employment with us.  While some normal employeeturnover is expected, and additional turnover may occur due to reduced job responsibilitiesin certain roles as a result of the Restructuring, unusually high turnovercould strain our ability to manage our ongoing operations as well as inhibitorganic and acquisition growth.

 

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**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 andelectricity industries have historically been affected by general economicdownturns, including conditions within the housing market.  Periods ofslowed economic activity generally result in decreased natural gas andelectricity consumption, and could result in increased customerattrition.  As a consequence, national or regional recessions or downturnsin economic activity that impact our industrial, commercial and residentialcustomers could adversely affect our revenues, our collections of billedaccounts receivable and our cash flows, and could restrict our future growth incertain markets, any of which could have an adverse effect on our business,results of operations and financial condition.

 

General economic conditionscan also impact the performance of various counterparties to variousarrangements, including:

 

·                  failure of a supplier todeliver commodity at a specified time for a specified price under existingsupply agreements, which could result in penalty assessments against us and/orcould result in higher commodity prices from purchasing replacement commoditieson the spot market;

·                  failure of localtransportation and transmission facilities to allow their facilities to beutilized in accordance with related agreements, which could result insignificant delays in delivery or higher costs associated with alternatefacilities;

·                  failure of other contracted entities todeliver goods or services when due or requested; and

·                  failure of performance by a counterparty toour hedge positions or lending agreements.

 

Such failures to perform byour business counterparties could have an adverse effect on our business,results of operations and financial condition.

 

**The successes, failures oractivities of various LDCs and other retail marketers within the markets thatwe serve may impact the perception of the Company.**

 

The general perception onthe part of customers and regulators of utilities and retail energy marketersin general, and of the Company in particular, is essential for our continuedgrowth and success.  Questionable pricing, billing, collections or customerservice practices on the part of any utility or retail marketer can damage thereputation of all market participants, which could result in lower customerrenewals and impact our ability to sign-on new customers.  Any utility orretail marketer that defaults on its obligations to its customers, suppliers,lenders, hedge counterparties, or employees can have similar impact on theretail energy industry as a whole and on our operations in particular.

 

**We are subject to regulatoryscrutiny in all of our markets.  Failure to follow prescribed regulatoryguidelines could result in customer complaints and regulatory sanctions.**

 

We generally must apply tobecome a retail marketer of natural gas and electricity in the markets that weserve.  Approval by the local regulatory body is subject to ourunderstanding of and compliance with various federal, state and localregulations that govern the activities of retail marketers.  If we fail tocomply with all such regulations, we could suffer certain consequences, whichmay include:

 

·                  higher customer complaintsand attrition;

·                  increased regulatoryscrutiny and sanctions, up to and including termination of our license orability to operate in those markets; and

·                  damage to our reputation with customers andregulators.

 

**We expend extensive resources to convert, improve and maintain ourinformation systems.  Failure to continue to successfully do so may resultin a negative impact on our results of operations, financial condition, cashflow and reputation with our customers and/or regulators.**

 

Our operations rely heavilyon the quality of our information systems and the employees that areresponsible to manage them.  If any of our system conversion orimprovement projects is unsuccessful, or if our processes for managing and maintainingour information systems are inadequate, we could be subjected to:

 

·                  inaccurate or non-timelyfinancial accounting and reporting information;

·                  inaccurate or non-timelycustomer billing information;

·                  customer complaints;

·                  increased regulatory scrutiny;

·                  inability to successfullycomplete future business combinations or other customer acquisitions; and/or

 

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·                  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 ourcustomers and employees live along the southeast coast of Texas are vulnerableto hurricanes in the Gulf of Mexico.**

 

Because of its proximity tothe Gulf of Mexico, the southeastern coast of Texas is vulnerable tohurricanes, which can cause significant damage to property and publicinfrastructure.  In particular, damage to property and disruption ofelectrical and other basic utilities for extended periods can have adevastating impact on areas struck by hurricanes, including our leasedfacilities in Houston, Texas and the surrounding communities where ouremployees live.  In addition, because we provide electricity to customersalong the southeast coast of Texas, extended disruption of electrical servicealso could have an adverse impact on our results of operations.

 

We have a businesscontinuity plan that is periodically reviewed and enhanced to ensure that theeffects of such disruptions on our operations result in minimal impact onservice provided to our customers and on our results of operations.  If our business continuity plan does notfunction as planned, our operations, financial position and results ofoperations may be negatively impacted.

 

**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 andtransmission infrastructure in the U.S. is very complex.  Maintainingreliability of the infrastructure requires appropriate oversight by regulatoryagencies, careful planning and design, trained and skilled operators,sophisticated information technology and communication systems, ongoingmonitoring and, where necessary, improvements to various components of theinfrastructure.  Despite extensive oversight and development of numeroussafeguards, major electric power blackouts are possible, which could disruptelectrical service for extended periods of time to large geographic regions ofthe U.S. and Canada.  If such a major blackout were to occur, we may beunable to deliver electricity to our customers in the affected region, whichwould have an adverse impact on our results of operations.

 

**We identified a material weakness in the design andoperation of our internal controls over financial reporting as of June 30,2009.  Although we have developed a remediationplan for the material weakness, there can be no assurance that such controlswill effectively prevent material misstatements in our consolidated financialstatements in future periods.**

 

In connection with thepreparation of our financial statements for fiscal year 2009, we reported tothe Audit Committee of our Board of Directors that certain significantdeficiencies in internal controls over financial reporting existed at June 30,2009 that, when evaluated in the aggregate, we concluded to be a materialweakness in the design and operation of internal control over financialreporting at June 30, 2009. Therefore, we have concluded that, as of June 30, 2009, the Company’sinternal control over financial reporting was not effective.

 

A material weakness is adeficiency, or a combination of control deficiencies, in internal control overfinancial reporting such that there is a reasonable possibility that a materialmisstatement of the Company’s annual or interim financial statements will notbe prevented or detected on a timely basis.

 

The material weaknessidentified as of June 30, 2009 relates to certain significant deficienciesthat we identified during our year-end financial statement close process andothers that relate to errors identified during the year-end audit for thefiscal year ended June 30, 2009. These significant deficiencies resulted in adjustments to our accountingrecords at June 30, 2009 that were not deemed by management to bematerial, individually or in the aggregate, in relation to our financialposition or results of operations, taken as a whole, for any annual orquarterly reporting period during fiscal years 2009 or 2008.

 

To remedy this materialweakness, we have identified certain controls or processes that have been, or willbe, put into place with the intent to mitigate the risk of potential futuremisstatements from the identified significant deficiencies.  While we believe that these new controls andprocesses will remedy the material weakness, we have not yet tested our newlyimplemented controls and there can be no assurance that such controls willeffectively prevent material misstatements in our consolidated financialstatements in future periods.

 

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** **

**Risks Related to Liquidity,Indebtedness and Capital Structure**

 

**We may need to raise additional debt or letter ofcredit capacity to fund growth or operations, which may not be available to uson favorable terms or at all.**

 

Our business requires substantial capital to fundgrowth through organic marketing or acquisition, for supporting workingcapital, for the purchase of natural gas and electricity supply to meet ourcustomers’ needs, and for the credit requirements of forward physicalsupply.  We may need to incur additionaldebt or obtain additional letter of credit capacity in order to fund workingcapital, finance other acquisitions or for other purposes.  Our ability toobtain new financing will be constrained by the current economic conditionsaffecting financial markets and by the restrictive covenants contained in theagreements that govern the Commodity Supply Facility and the Fixed Rate Notesdue 2014.  Specifically, the recentcredit crisis and other related trends affecting the banking industry havecaused significant operating losses and failures throughout the bankingindustry.  Many lenders and institutionalinvestors have ceased to provide funding to worthy 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 will require a significantamount of cash to service our debt obligations.  Our ability to generatesufficient cash to service debt depends on the ability of our primary operatingsubsidiaries to generate adequate cash flow. We are limited in our ability to utilize the proceeds from new debt andequity issuances to prepay and repay the Fixed Rate Notes due 2014.**

 

Holdings has no material operating activities. Accordingly, Holdings’ only material source of cash, including cash to servicethe Commodity Supply Facility, Fixed Rate Notes due 2014 and the Floating RateNotes due 2011, comes from Holdings’ ownership interests in its primaryoperating subsidiaries.  Available distributions from our operatingsubsidiaries may depend on factors out of our control, which may include:

 

·                  the financial performance of ouroperating subsidiaries;

·                  covenants contained in our debtagreements;

·                  covenants contained in other agreementsto which we or our subsidiaries are or may become subject;

·                  business and tax considerations; and

·                  applicable laws, including laws regardingthe payment of distributions.

 

Our ability to makepayments on and to refinance our debt, and to fund planned capital expendituresand expansion efforts and any strategic acquisitions we may make in the future,if any, will depend on our ability to generate cash in the future.  This,to a certain extent, is subject to general economic, financial, competitive andother factors that are beyond our control. There can be no assurance that our business will generate sufficient cashflow from operations in the future, that our currently anticipated growth innet sales and cash flow will be realized or that future borrowings will beavailable to us in an amount sufficient to enable us to repayindebtedness.  Additionally, the terms of the Commodity Supply Facilitylimit 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.**

 

Dramatic swings in the market prices for natural gasduring the fiscal year ended June 30, 2009 resulted in a significantstrain on our liquidity under the Revolving Credit Facility.  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.

 

**Our substantial debt obligations could adverselyaffect our financial health and prevent us from fulfilling such obligations,including our obligations under****Commodity Supply Facility,****the FixedRate Notes due 2014 and Floating Rate Notes due 2011 and we might havedifficulty obtaining more financing.**

 

Our substantial debt obligations could have importantconsequences, which could include:

 

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·                  making it more difficult for us tosatisfy our 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,or reacting 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.

 

Significant increases in energy prices or otheradverse industry or financial trends that are outside of our direct controlcould cause us to draw down on a portion or all of our available credit. We may require additional indebtedness in the future.  Our ability toobtain new debt is limited by the agreements governing the Commodity SupplyFacility, 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.

 

**Restrictive covenants in theterms of our financings may reduce our operational and financial flexibility,which may prevent us from capitalizing on business opportunities.**

 

The agreements thatgovern the Commodity Supply Facility and the Fixed Rate Notes due 2014 containa number of operating and financial covenants restricting Holdings’ and itssubsidiaries’ ability to, among other things:

 

·                  incur additional indebtedness;

·                  create liens on assets;

·                  pay dividends or distributions on, orredeem or 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.

 

In addition, under theCommodity Supply Facility, Holdings and its subsidiaries will be required tomaintain a collateral coverage ratio.  Ifwe breach any of the covenants contained in the agreements that govern theCommodity Supply Facility or the indenture that governs the Fixed Rate Notesdue 2014, the principal of, and accrued interest on, the applicable debt couldbecome due and payable.  In addition,that default could constitute a cross-default under our otherindebtedness.  Although any default underthe Fixed Rate Notes due 2014 is subject to certain standstill provisions, ifsuch a default or cross-default were to occur, we would not be able to satisfyour debt obligations, which would have a substantial material adverse impact onour ability to continue as a going concern. We cannot assure you 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 result of the Restructuring,amended organizational documents and governance agreements and the significantchanges in our equity ownership and the composition of our board of directorscould have a material impact on the Company’s future strategic direction.**

 

The change in ownership and the change in compositionof our board of directors, as well as the separate approval rights of holdersof our Class A Common Stock, Class B Common Stock and Class CCommon Stock, and their respective directors, could have an impact on the futuredirection of the Company, including decisions regarding financing arrangements,capital structure, senior management appointments and business operations.  The interests of the holders of the variousclasses of our common stock and their respective directors followingconsummation of the Restructuring may not be compatible with the interests ofother shareholders and directors, or with the strategic objectives of seniormanagement of the Company.

 

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**ITEM 1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2.  PROPERTIES**

 

Our corporateheadquarters, which are comprised of executive, finance, marketing, riskmanagement, internal audit and legal functions, are located in Stamford,Connecticut.  Several of our operationalfunctions, including pricing, information technology, customer operations anddata solutions, accounting operations, collections, and certain human resourcesfunctions are located in Houston, Texas, where most of our employees currentlywork.  We also have electricityoperations and customer care staff located in Annapolis Junction, Maryland.

 

We lease all of ourproperties.  As of June 30, 2009, webelieve that all properties are suitable and adequate for the businessconducted therein, are being appropriately used and have sufficient capacityfor the present intended purposes.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

From time to time, we area party to claims and legal proceedings that arise in the ordinary course ofbusiness, including investigations of product pricing and billing practices byvarious governmental or other regulatory agencies. We do not believe that anysuch proceedings to which we are currently a party will have a material adverseimpact on our results of operations or financial position.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

We did not submit anymatters to a vote of security holders during the fourth quarter of fiscal year2009.

 

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## ***Table of Contents***

 

## ***PART II.***

## *** ***

**ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

There is no establishedtrading market for our common stock, par value $.01 per share.  As of September 22, 2009, there were 47holders of record of our Class A Common Stock, 1 holder of our Class BCommon Stock and 66 holders or our Class C Common Stock.

 

**DividendPolicy and Restrictions**

 

Our Board of Directors,at its discretion, has the authority to declare and pay dividends on our commonstock provided there were funds available to do so.  In addition, holders of the Preferred Stockare entitled to participate in any dividend paid on our Class A CommonStock, Class B Common Stock and Class C Common Stock.

 

We are restricted in ourability to pay dividends by various provisions of agreements that govern theCommodity Supply Facility and our debt instruments.  We have never declared or paid any cashdividends on our common stock and do not intend to pay any cash dividends onour common stock in the foreseeable future. We currently intend to retain any future earnings in order to financethe expansion of our business and for general corporate purposes.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

The table below providesinformation, as of June 30, 2009, concerning securities authorized forissuance under our equity compensation plans.

 
| **Plan Category**                                      | ** ** | **Number  of  securities  to be issued  upon  exercise of  outstanding  options (2)** | ** ** | **Weighted  average  exercise  price of  outstanding  options** | ** ** | **Number of  securities  remaining  available  for future  issuance  under equity  compensation  plans (3)** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                                      |       |                                                                 |       |                                                                                                                             |       |
| Equity  compensation plans approved by security holders (1) |       | 981,270                                                                                                   |       | $                                                                    | 29.31      |                                                                                                                             | 396,462    |   |
|                                                             |            |                                                                                                           |            |                                                                      |            |                                                                                                                                  |            |  |

 

----

(1)          As of June 30, 2009, all of ourequity compensation plans were approved by security holders.

(2)          Excludes 27,500 warrants issued toemployees that were not issued under any equity compensation plan.  As of June 30, 2009, the weightedaverage exercise price for these warrants was $26.86.  Pursuant to the Restructuring, we offered acash settlement to holders of options and warrants to cancel and terminate suchoptions and warrants.  As of September 22,2009, all options and warrants were terminated.

(3)          Excludes securities reflected in thefirst column.

 

**Recent Sales of UnregisteredSecurities**

 

On September 22,2009, we consummated an exchange of $158.8 million aggregate principal amountof outstanding Floating Rate Notes due 2011 for $26.7 million of cash, $67.8million of Fixed Rate Notes due 2014 and 33,940,683 shares of newly authorized Class ACommon Stock.  The shares of Class ACommon Stock issued to the holders of the Fixed Rate Notes due 2014 represented62.5% of the total aggregate shares of common stock outstanding afterconsummation of the Restructuring. Additionally, in connection with the Restructuring and as a condition ofthe agreements governing the Commodity Supply Facility, we issued 4,002,290shares of newly authorized Class B Common Stock to RBS Sempra, whichrepresented 7.37% of our total aggregate shares of common stock outstandingafter consummation of the Restructuring.

 

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**ITEM 6.  SELECTED FINANCIAL DATA**

 

**AdjustedEBITDA**

 

Management believes thatAdjusted EBITDA, which is not a financial measure recognized under accountingprinciples generally accepted in the United States (“U.S. GAAP”), is a measurecommonly used by financial analysts in evaluating operating performance andliquidity of companies, including energy companies.  Management also believes that this measureallows a standardized comparison between companies in the energy industry,while minimizing the differences from depreciation policies, financialleverage, 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.

 

EBITDA is defined as netincome (loss) before interest expense, income tax expense (benefit),depreciation and amortization.  AdjustedEBITDA is defined by management as net income (loss) before interest expense,income tax expense (benefit), depreciation, amortization, stock compensationexpense and unrealized gains (losses) from risk management activities.  Management believes the items excluded fromEBITDA to calculate Adjusted EBITDA are not indicative of true operatingperformance or liquidity of the business and generally reflect non-cash chargesfor the reporting periods.  Therefore, webelieve that 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, which are beingeconomically hedged.  In addition, as theunderlying customer contracts are not marked-to-market, the unrealized gains (losses)from risk management activities do not offer an accurate indication of theultimate cash impact to the business, as the ultimate cash impact to thebusiness is not determinable until delivery of natural gas and electricityunder the customer contracts and the associated realized gain (loss) on riskmanagement activity.

 

Management uses AdjustedEBITDA for a variety of purposes, including assessing our performance andliquidity, 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 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, preferred stock,stock options and warrants), and assessing compensation incentives for ouremployees.  Management also provides financialperformance measures to our senior executive team, Board of Directors andsignificant shareholders with an emphasis on Adjusted EBITDA, on a consolidatedbasis, as the appropriate basis with which to measure the performance andliquidity of our business.  Furthermore,certain financial covenants in our Commodity Supply Facility contain ratiosbased on EBITDA and the items defined above that are excluded to calculateAdjusted EBITDA, as well as other items. Accordingly, management and our significant shareholders utilizeAdjusted EBITDA as a primary measure when assessing our operating performanceand liquidity of our business.

 

EBITDA and AdjustedEBITDA have limitations as analytical tools in comparison to operating incomeor other combined income data prepared in accordance with U.S. GAAP.  Some of these limitations are:

 

·                  they do not reflect cash outlays for capital expenditures orcontractual commitments;

·                  they do not reflect changes in, or cash requirements for, workingcapital;

·                  they do not reflect the interest expense or the cash requirementsnecessary to service interest or principal payments on indebtedness;

·                  they do not reflect income tax expense or the cash necessary to payincome taxes;

·                  although depreciation and amortization are non-cash charges, the assetsbeing depreciated and amortized will often have to be replaced in the future,and EBITDA and Adjusted EBITDA do not reflect cash requirements for suchreplacements;

·                  Adjusted EBITDA does not reflect the impact of earnings or chargesresulting from matters we consider not to be indicative of our ongoingoperations; and

·                  other companies, including other companies in our industry, maycalculate these measures differently than as presented in this Annual Report,limiting its usefulness as a comparative measure.

 

Because of theselimitations, EBITDA and Adjusted EBITDA and the related ratios should not beconsidered as a measure of discretionary cash available to invest in businessgrowth or reduce indebtedness.

 

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The financial dataincluded in the following table was derived from our consolidated financialstatements, which are included elsewhere in this Annual Report.  The table includes a reconciliation from netincome (loss) calculated on a U.S. GAAP basis to EBITDA and AdjustedEBITDA.  The financial information in thetable should be read in conjunction with, and is qualified by reference to, ourconsolidated financial statements and notes thereto and commentary included inthis section.

 
| ** **                                              | ** **                                                          | **Fiscal Year Ended June 30,** | ** **  |
|---------------------------------------------------------|---------------------------------------------------------------------|----------------------------------------------------|-------------|
| ** **                                              | ** **                                                          | **2009**                                           | ** **  | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                              | ** **                                                          | **(in thousands)**                            | ** **  |
| **Selected statement of operations data:**              |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| Sales  of natural gas and electricity (1)               | ** **                                                          | **$**                                              | **789,780** |   | $ | 752,283 |   | $ | 703,926 |   | $ | 362,561 |   | $ | 277,196 |   |
| Cost  of goods sold (1)                                 | ** **                                                          | **757,146**                                        |        | 569,585 |   | 602,146 |   | 389,526 |   | 202,112 |   |
| Gross  profit (loss)                                    | ** **                                                          | **32,634**                                         |        | 182,698 |   | 101,780 |   | (26,965 | ) | 75,084 |   |
| Operating  expenses                                     | ** **                                                          | **114,779**                                        |        | 106,645 |   | 91,015 |   | 36,618 |   | 30,996 |   |
| Operating  (loss) profit                                | ** **                                                          | **(82,145**                                        | **)**       | 76,053 |   | 10,765 |   | (63,583 | ) | 44,088 |   |
| Interest  expense, net of interest income               | ** **                                                          | **45,305**                                         |        | 34,105 |   | 33,058 |   | 3,200 |   | 2,858 |   |
| (Loss)  income before income tax benefit (expense)      | ** **                                                          | **(127,450**                                       | **)**       | 41,948 |   | (22,293 | ) | (66,783 | ) | 41,230 |   |
| Income  tax benefit (expense)                           | ** **                                                          | **27,249**                                         |        | (17,155 | ) | 8,495 |   | 27,001 |   | (18,142 | ) |
| Net  (loss) income                                      | ** **                                                          | **(100,201**                                       | **)**       | 24,793 |   | (13,798 | ) | (39,782 | ) | 23,088 |   |
|                                                    |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| Items  to reconcile net (loss) income to EBITDA:        |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| Add:                                                    | Interest expense, net  of interest income                           | ** **                                         | **45,305**  |   | 34,105 |   | 33,058 |   | 3,200 |   | 2,858 |   |
|                                                    | Depreciation and  amortization                                      | ** **                                         | **37,575**  |   | 32,698 |   | 27,730 |   | 8,504 |   | 6,166 |   |
|                                                    | Income tax (benefit)  expense                                       | ** **                                         | **(27,249** | **)** | 17,155 |   | (8,495 | ) | (27,001 | ) | 18,142 |   |
| EBITDA                                                  | ** **                                                          | **(44,570**                                        | **)**       | 108,751 |   | 38,495 |   | (55,079 | ) | 50,254 |   |
|                                                    |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| Items  to reconcile EBITDA to Adjusted EBITDA:          |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| Add (less):                                             | Stock  compensation expense                                         | ** **                                         | **519**     |   | 3,358 |   | 4,539 |   | 911 |   | 2,033 |   |
|                                                    | Unrealized  losses (gains) from risk management activities, net (2) | ** **                                         | **87,575**  |   | (67,168 | ) | 17,079 |   | 79,897 |   | (16,004 | ) |
| Adjusted  EBITDA                                        | ** **                                                          | **$**                                              | **43,524**  |   | $ | 44,941 |   | $ | 60,113 |   | $ | 25,729 |   | $ | 36,283 |   |
|                                                    |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| **Selected balance sheet data (period-end  balances):** |                                                                |                                               |        |   |   |   |   |   |   |   |   |
| Total  current assets                                   | ** **                                                          | **$**                                              | **203,506** |   | $ | 271,973 |   | $ | 257,708 |   | $ | 67,517 |   | $ | 157,122 |   |
| Customer  acquisition costs, net                        | ** **                                                          | **27,950**                                         |        | 41,693 |   | 38,954 |   | 10,822 |   | 7,171 |   |
| Total  assets                                           | ** **                                                          | **259,071**                                        |        | 355,752 |   | 335,644 |   | 97,969 |   | 191,592 |   |
| Total  current liabilities                              | ** **                                                          | **99,042**                                         |        | 108,276 |   | 91,686 |   | 29,894 |   | 74,640 |   |
| Long-term  debt (3)                                     | ** **                                                          | **163,476**                                        |        | 162,648 |   | 185,404 |   | — |   | 21,379 |   |
| Redeemable  convertible preferred stock (4)             | ** **                                                          | **54,632**                                         |        | 48,779 |   | 29,357 |   | 29,357 |   | 29,357 |   |
| Total  stockholders’ equity                        | ** **                                                          | **(72,150**                                        | **)**       | 33,210 |   | 25,611 |   | 35,393 |   | 75,920 |   |
|                                                         |                                                                     |                                                    |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1) | Sales of natural  gas and electricity and cost of goods sold each include pass-through revenue,  primarily representing transportation and distribution charges billed to  customers on behalf of certain LDCs, that approximated $68.3 million, $63.6  million and $54.5 million for the fiscal years ended June 30, 2009, 2008  and 2007, respectively. Sales of natural gas and electricity also includes  fee income charged to customers, such as late payment fees, early termination  fees and service shut-off fees that approximated $22.4 million, $19.4 million  and $17.1 million for the fiscal years ended June 30, 2009, 2008 and  2007, respectively. Pass-through revenue and fee income was not material for  fiscal years prior to 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Unrealized gains  and losses from risk management activities result from changes in forward  natural gas and electricity prices during the respective periods in relation  to the contracted forward prices. These amounts should be fully or  substantially offset in future periods, as physical commodity is delivered to  customers during the remaining terms of their fixed rate contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3) | The Floating  Rate Notes due 2011 (net of original issue discount) were issued during the  fiscal year ended June 30, 2007 primarily to provide financing for the  acquisition of Shell Energy Services Company L.L.C. in August 2006 (the  “SESCo Acquisition”), with the balance being used for working capital needs.  Pursuant to the Restructuring, $158.8 million aggregate principal amount of  Floating Rate Notes due 2011 were exchanged for cash, common stock and the  Fixed Rate Notes due 2014.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (4) | On or after the  fifth anniversary of the issuance of the Preferred Stock, if the fair market  value of Holdings’ common stock was not at a level that would have provided  the affiliates of Charterhouse and GCP (the “Preferred Investors”) with an  annual rate of return of at least 25%, compounded annually, for the five-year  period ending June 30, 2009, the Preferred Investors could have required  that the Company make a redemption election. If the holders of the Preferred  Stock required the Company to make a redemption election, and if the Company  elected to redeem the Preferred Stock, the redemption amount would have been  payable in cash equal to the greater of: (1) the fair market value of  the shares of common stock into which the Preferred Stock could have been  converted on the date of the redemption election notice; or (2) the  original issue price of $21.36 per share, plus any accrual of dividends. If  the Company elected not to redeem the Preferred Stock, it would have been  required to grant the Preferred Investors effective control over Holding’s  Board of Directors. As of June 30, 2009, if the holders of Preferred  Stock had requested that the Company make a redemption election, the Company  did not have the intent or the ability to redeem the Preferred Stock due to  limitations included in the agreements that governed the Revolving Credit Facility,  the Hedge Facility and the Floating Rate Notes due 2011. However, since the  Preferred Investors would have effectively controlled the Company’s Board of  Directors in the event that the Company did not elect to redeem the Preferred  Stock, the Company has determined that, in accordance with U.S. GAAP, the  Preferred Stock was redeemable at the option of the Preferred Investors and  that it was probable that the Preferred Stock became redeemable at  June 30, 2009. Therefore the carrying value of the Preferred Stock was  recorded outside of stockholders’ equity on the consolidated balance sheets  was adjusted to its redemption value as of June 30, 2009. As of  June 30, 2009, the holders of Preferred Stock did not make an election  to redeem the Preferred Stock. Pursuant to the Restructuring, the Preferred  Stock was converted to Class C Common Stock on September 22, 2009. |

 

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A reconciliation ofAdjusted EBITDA to net cash (used in) provided by operating activities isprovided in the following table.

 
| ** **                                                                            | ** ** | **Fiscal Year Ended June 30,** | ** **  |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                                                                            | ** ** | **2009**                                           | ** **  | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                  |       |                                               |        |   |   |   |   |   |   |   |   |
| Adjusted EBITDA                                                                       | ** ** | **$**                                              | **43,524**  |   | $ | 44,941 |   | $ | 60,113 |   | $ | 25,729 |   | $ | 36,283 |   |
| Interest expense, net of interest income                                              | ** ** | **(45,305**                                        | **)**       | (34,105 | ) | (33,058 | ) | (3,200 | ) | (2,858 | ) |
| Income tax benefit (expense)                                                          | ** ** | **27,249**                                         |        | (17,155 | ) | 8,495 |   | 27,001 |   | (18,142 | ) |
| Stock compensation expense                                                            |       | —                                             |        | (1,654 | ) | — |   | — |   | — |   |
| Deferred tax (benefit) expense                                                        | ** ** | **(23,406**                                        | **)**       | 18,187 |   | (14,449 | ) | (32,764 | ) | 6,552 |   |
| Unrealized losses on interest rate swaps and  amortization of deferred financing fees | ** ** | **16,233**                                         |        | 10,836 |   | 7,906 |   | 1,057 |   | 349 |   |
| Amortization of customer contracts acquired                                           | ** ** | **(634**                                           | **)**       | (762 | ) | 11,891 |   | (3,276 | ) | — |   |
| Change in assets and liabilities, net of effects of  acquisition:                     |       |                                               |        |   |   |   |   |   |   |   |   |
| Restricted cash                                                                       | ** ** | **(74,781**                                        | **)**       | 463 |   | (623 | ) | 6,953 |   | 2,195 |   |
| Accounts receivable                                                                   | ** ** | **40,075**                                         |        | (30,181 | ) | 3,453 |   | (13,003 | ) | 3,271 |   |
| Natural gas inventories                                                               | ** ** | **36,509**                                         |        | (7,308 | ) | (1,712 | ) | (2,685 | ) | (72 | ) |
| Income taxes receivable                                                               | ** ** | **1,063**                                          |        | (7,173 | ) | 5,184 |   | (5,535 | ) | — |   |
| Option premiums                                                                       | ** ** | **1,571**                                          |        | 1,191 |   | 1,835 |   | (1,834 | ) | — |   |
| Other assets                                                                          | ** ** | **(20,509**                                        | **)**       | 609 |   | (993 | ) | 2,645 |   | 895 |   |
| Accounts payable and accrued liabilities                                              | ** ** | **(46,553**                                        | **)**       | 17,882 |   | 31,555 |   | (5,320 | ) | 1,283 |   |
| Deferred revenue                                                                      | ** ** | **(3,164**                                         | **)**       | (4,352 | ) | 9,384 |   | 865 |   | 1,538 |   |
| Net cash (used in) provided by operating activities                                   | ** ** | **$**                                              | **(48,128** | **)** | $ | (8,581 | ) | $ | 88,981 |   | $ | (3,367 | ) | $ | 31,294 |   |
| Net cash used in investing activities                                                 | ** ** | **$**                                              | **(17,953** | **)** | $ | (33,941 | ) | $ | (132,920 | ) | $ | (18,825 | ) | $ | (8,296 | ) |
| Net cash provided by (used in) financing activities                                   | ** ** | **$**                                              | **17,389**  |   | $ | (22,462 | ) | $ | 174,788 |   | $ | (25,345 | ) | $ | 24,396 |   |

 

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**SelectedData for Business Segments**

 

Selected financialoperating data for our natural gas and electricity business segments isprovided in the following table.

 
| **Fiscal Year ended June 30,**                                                 | ** ** | **Natural Gas** | ** **  | **Electricity**         | ** ** | **Total**    | ** **   |
|----------------------------------------------------------------------------------------------------|------------|----------------------|-------------|-------------------------|------------|--------------|--------------|
| ** **                                                                                         | ** ** | ** **           | ** **  | **(in thousands)** | ** ** | ** **   | ** **   |
| **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** | **)** |
| ** **                                                                                         | ** ** | ** **           | ** **  | ** **              | ** ** | ** **   | ** **   |
| **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       |   |
|                                                                                               |       |                 |        |                    |       |         |         |
| **2007:**                                                                                          |       |                 |        |                    |       |         |         |
| Sales                                                                                              |       | $                    | 680,811     |                    | $          | 23,115       |         | $ | 703,926 |   |
| Cost of goods sold (excluding unrealized gains  (losses) from risk management activities, net) (1) |       | (565,531             | )           | (19,536                 | )          | (585,067     | )            |
| Gross profit (excluding unrealized gains (losses) from  risk management activities, net) (1)       |       | $                    | 115,280     |                    | $          | 3,579        |         | 118,859 |   |
|                                                                                               |       |                 |        |                    |       |         |         |
| Items to reconcile total segment gross profit to  loss before income tax benefit:                  |       |                 |        |                    |       |         |         |
| Unrealized gains (losses) from risk management  activities, net                                    |       |                 |        |                    |       | (17,079      | )            |
| Operating expenses                                                                                 |       |                 |        |                    |       | (91,015      | )            |
| Interest expense, net of interest income                                                           |       |                 |        |                    |       | (33,058      | )            |
|                                                                                               |       |                 |        |                    |       |         |         |
| Loss before income tax benefit                                                                     |       |                 |        |                    |       | $            | (22,293      | ) |

 

----

| (1) | Includes  realized losses from risk management activities, but excludes unrealized  gains (losses) from risk management activities. As the underlying customer  contracts are not marked-to-market, the unrealized gains (losses) from risk  management activities do 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 delivery of natural gas under the customer contracts  and the associated gain (loss) on risk management activity is realized. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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Additional selectedoperating data for our business segments is summarized in the following table.

 
| ** **                                        | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Natural Gas:**                                  | ** ** | ** **                                         |       |   |   |   |   |   |   |   |   |
| RCEs at period end                                | ** ** | **487,000**                                        |       | 601,000 |   | 588,000 |   | 375,000 |   | 337,000 |   |
| Average RCEs during the period                    | ** ** | **554,000**                                        |       | 588,000 |   | 595,000 |   | 380,000 |   | 338,000 |   |
| MMBtus sold during the period                     | ** ** | **54,806,000**                                     |       | 54,339,000 |   | 57,064,000 |   | 35,488,000 |   | 32,957,000 |   |
| Sales per MMBtu sold during the period            | ** ** | **$**                                              | **12.24**  |   | $ | 12.32 |   | $ | 11.93 |   | $ | 9.74 |   | $ | 8.03 |   |
| Gross profit per MMBtu during the period (1) | ** ** | **$**                                              | **1.79**   |   | $ | 1.94 |   | $ | 2.02 |   | $ | 1.38 |   | $ | 1.75 |   |
| Heating degree days                               | ** ** | **4,460**                                          |       | 4,249 |   |   | (3) |   | (3) |   | (3) |
|                                              | ** ** | ** **                                         |       |   |   |   |   |   |   |   |   |
| **Electricity:**                                  | ** ** | ** **                                         |       |   |   |   |   |   |   |   |   |
| RCEs at period end                                | ** ** | **75,000**                                         |       | 98,000 |   | 43,000 |   | 12,000 |   | 11,000 |   |
| Average RCEs during the period                    | ** ** | **87,000**                                         |       | 68,000 |   | 20,000 |   | 12,000 |   | 12,000 |   |
| MWhrs sold during the period                      | ** ** | **851,000**                                        |       | 636,000 |   | 193,000 |   | 120,000 |   | 130,000 |   |
| Sales per MWhr sold during the period             | ** ** | **$**                                              | **140.07** |   | $ | 130.13 |   | $ | 119.77 |   | $ | 141.10 |   | $ | 97.69 |   |
| Gross profit per MWhr during the period (1)  | ** ** | **$**                                              | **26.14**  |   | $ | 16.08 |   | $ | 18.54 |   | $ | 32.58 |   | $ | 11.54 |   |
| Cooling degree days                               | ** ** | **1,361**                                          |       | 1,267 |   |   | (2) |   | (2) |   | (2) |

 

----

| (1) | Includes fee  income and realized losses from risk management activities, but excludes unrealized  (gains) losses from risk management activities.               |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Information is  not meaningful due to the relative small size of the electricity customer  portfolio and related volumes in relation to consolidated operations. |
| (3) | Data not  available.                                                                                                                                             |

 

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**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**ExecutiveOverview**

 

Management uses AdjustedEBITDA for various management purposes, which are outlined in “Item 6. SelectedFinancial Data”.  Significant activityaffecting Adjusted EBITDA is summarized in the following table.  Refer to “Results of Operations” below forcommentary regarding the changes noted in this table.

 
| ** **                                                                                             | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2009**                                           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                             | ** ** | **(in thousands)**                                 | ** ** |
|                                                                                                   |       |                                               |       |   |   |   |   |   |   |   |   |
| Adjusted EBITDA for prior fiscal year                                                                  | ** ** | **$**                                              | **44,941** |   | $ | 60,113 |   | $ | 25,729 |   | $ | 36,283 |   | $ | 15,830 |   |
| Increases (decreases) in Adjusted EBITDA resulting  from:                                              |       |                                               |       |   |   |   |   |   |   |   |   |
| Changes in gross profit, excluding unrealized  (gains) losses from risk management activities, due to: |       |                                               |       |   |   |   |   |   |   |   |   |
| Natural gas                                                                                            | ** ** | **(7,335**                                         | **)**      | (9,977 | ) | 66,258 |   | (8,568 | ) | 29,004 |   |
| Electricity                                                                                            | ** ** | **12,014**                                         |       | 6,648 |   | (331 | ) | 2,420 |   | 703 |   |
| Higher operating expenses, excluding depreciation,  amortization and stock compensation expense        | ** ** | **(6,096**                                         | **)**      | (11,843 | ) | (31,543 | ) | (4,406 | ) | (9,254 | ) |
| Adjusted EBITDA for current fiscal year                                                                | ** ** | **$**                                              | **43,524** |   | $ | 44,941 |   | $ | 60,113 |   | $ | 25,729 |   | $ | 36,283 |   |

 

**BalanceSheet Overview**

 

***Guaranteed and Non-Guaranteed Customer Accounts Receivable***

 

Accounts receivable, netis summarized in the following table.

 
| ** **                                       | ** ** | **Balances at June 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                      | ** ** |
| Billed customer accounts receivable:             | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Guaranteed by LDCs                               | ** ** | **$**                                   | **7,768**  | ** ** | **$** | 17,085 | ** ** |
| Non-guaranteed by LDCs                           | ** ** | **26,679**                              |       | 32,966 |   |
| ** **                                       |       | **34,447**                              |       | 50,051 |   |
| Unbilled customer accounts receivable:           |       |                                    |       |   |   |
| Guaranteed by LDCs                               | ** ** | **5,737**                               |       | 9,803 |   |
| Non-guaranteed by LDCs                           | ** ** | **10,547**                              |       | 19,905 |   |
| ** **                                       |       | **16,284**                              |       | 29,708 |   |
| Total customer accounts receivable               | ** ** | **50,731**                              |       | 79,759 |   |
| Less: Allowance for doubtful accounts            | ** ** | **(7,344**                              | **)**      | (5,154 | ) |
| Customer accounts receivable, net                | ** ** | **43,387**                              |       | 74,605 |   |
| Imbalance settlements and other receivables, net | ** ** | **4,211**                               |       | 13,068 |   |
| Accounts receivable, net                         | ** ** | **$**                                   | **47,598** |   | $ | 87,673 |   |

 

Billed customer accountsreceivable represents uncollected revenues that have been billed directly tocustomers by us or on our behalf by certain LDCs.  Unbilled customer accounts receivablerepresents estimated revenues associated with natural gas and electricity consumedbut not yet billed to customers under an LDC’s monthly cycle billing method.

 

Our credit risk islimited as certain LDCs guarantee billed and unbilled customer accountsreceivable or amounts due for delivered gas and electricity.  In cases where receivables are guaranteed bythe LDC, we are exposed only to the credit risk of the LDC, rather than that ofour actual customers.  As of June 30,2009 and 2008, all of our billed and unbilled customer accounts receivable inguaranteed markets were guaranteed by 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.

 

In the market areas wherethe LDC does not guarantee customer accounts receivable, we maintain anallowance for doubtful accounts that is based upon the credit risk of ourcustomers, historical trends and other information.  Refer to Note 6 of the consolidated financialstatements included elsewhere in this Annual Report for additional analysis ofour allowance for doubtful accounts.  Baddebt expense associated with non-guaranteed accounts receivable wasapproximately 3% of related sales of natural gas and electricity for fiscalyear 2009 and 1% of related sales of natural gas and electricity for fiscalyears 2008 and 2007.

 

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Imbalance settlementsrepresent differences between the natural gas or electricity delivered to LDCsor ISOs for consumption by our customers and actual usage by ourcustomers.  Such imbalances are expectedto be settled with cash within the fiscal year following the balance sheetdate.  Imbalance settlements willfluctuate from period to period depending on the market price for natural gasand electricity, weather patterns and other factors that affect customerconsumption, 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 resultedin us recording an incremental provision for bad debt expense of approximately$0.6 million during fiscal year 2009, which is included in our allowance fordoubtful accounts at June 30, 2009.

 

We operate in 39 marketareas located in 14 U.S. states and 2 Canadian provinces.  Our diversified geographic coverage mitigatesthe credit exposure which could result from concentrations in a single LDCterritory, or a single regulatory jurisdiction, from extreme local weatherpatterns or from an economic downturn in any single geographic region.

 

In addition, we havelimited exposure to risk associated with high concentrations of sales volumeswith individual customers.  For thefiscal years ended June 30, 2009, 2008 and 2007, our largest customeraccounted for approximately 2% of total sales of natural gas.

 

Refer to “Item 7A.  Quantitative and Qualitative DisclosuresAbout Market Risk” for additional commentary regarding our approach formanagement of credit risk associated with customer accounts receivable.

 

***NaturalGas Inventories***

 

Natural gas inventoriesare summarized in the following table.

 
| ** **                                   | ** ** | **Balances at June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **(in thousands)**            | ** ** |
|                                         |       |                          |       |   |   |
| Storage  inventory for delivery to customers | ** ** | **$**                         | **24,457** | ** ** | **$** | 52,807 | ** ** |
| Imbalance  settlements in-kind (1)           | ** ** | **4,958**                     |       | 12,195 |   |
| Other                                        |       | —                        |       | 4 |   |
| Total                                        | ** ** | **$**                         | **29,415** |   | $ | 65,006 |   |

 

----

| (1) | Represents inventory to be transferred to the  Company or its customers from LDCs as a result of an excess of natural gas  deliveries over amounts used by customers in prior periods. These inventories  are expected to be transferred to the Company or its customers within the  upcoming twelve-month period. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

After reaching recordhighs during the three months ended June 30, 2008, natural gas marketprices dropped sharply during fiscal year 2009, which resulted in a 60%decrease in our weighted-average cost per MMBtu of natural gas included in naturalgas storage inventory from June 30, 2008 to June 30, 2009.  The resulting decrease in natural gasinventories was partially offset by a 14% increase in MMBtus of natural gasheld in storage over the same period.

 

***UnrealizedGains and Losses from Risk Management Activities, Net***

 

Unrealized gains andlosses from risk management activities recorded on the consolidated balancesheets primarily reflect the current market values for commodity derivativesutilized as economic hedges to reduce our exposure to changes in the prices ofnatural gas and electricity.  Changes insuch market value during the term of a derivative contract are recorded asunrealized gains and losses from risk management activities on the consolidatedstatements of operations.  As derivativecontracts expire and related market values are settled, realized gains andlosses are recorded on the consolidated statements of operations.

 

Market Prices for naturalgas decreased sharply during fiscal year 2009, which resulted in lower forward commoditycontract prices as compared with the average prices on related open hedgecontracts for natural gas entered into to match customer contracts for futuresales of natural gas.  As a result, totalunrealized gains from risk management activities included in current andlong-term assets on the consolidated balance sheets decreased to approximately$0.3****million at June 30, 2009 from$49.1 million at June 30, 2008. Market prices for natural gas decreased sharply during fiscal year 2009,which resulted 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.  Total unrealized losses from risk managementactivities included in current and long-term liabilities increased toapproximately $48.3 million at June 30, 2009 from $5.8 

 

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million at June 30,2008.  Additionally, on the consolidatedstatements of operations, both realized and unrealized losses from riskmanagement activities increased significantly during fiscal year 2009.

 

***Long-Term Debt***

 

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

 

As of June 30, 2009,we had $165.2 million aggregate principal amount of Floating Rate Notes due2011 outstanding.  On September 22,2009, we consummated an exchange offer pursuant to which we exchanged $158.8million aggregate principal amount of Floating Rate Notes due 2011 for $26.7million of cash, $67.8 million aggregate principal amount of Fixed Rate Notesdue 2014 and 33,940,683 shares of newly authorized Class A Common Stock.  The shares of Class A Common Stockissued to the holders of the Fixed Rate Notes due 2014 represented 62.5% of thetotal aggregate shares of common stock outstanding after consummation of theRestructuring.  The Fixed Rate Notes due2014 were issued at a discount, which will be recorded as a reduction from theFixed Rate Notes due 2014 on our consolidated balance sheet, and which will beamortized over the remaining life of the Fixed Rate Notes due 2014.

 

Holders of $6.4 millionaggregate principal amount of Floating Rate Notes due 2011 did not tender theirnotes pursuant to the Restructuring. These Floating Rate Notes due 2011 will remain on our consolidatedbalance sheets until acquired or retired by us or until their maturity date in August 2011.

 

**DenhamCredit Facility**

 

Denham is a significantstockholder of the Company.  Denham hadextended a $12.0 million line of credit to us, which bore interest at 9% perannum.  The termination date for the DenhamCredit Facility was May 19, 2010. At June 30, 2008, there was nobalance outstanding under the Denham Credit Facility.  In September 2008, we borrowed theentire $12.0 million available under the Denham Credit Facility, the entirebalance of which was outstanding at June 30, 2009.  The entire balance of the Denham CreditFacility, plus accrued interest, was repaid and the Denham Credit Facility wasterminated on September 22, 2009.

 

**BridgeFinancing Loans**

 

Pursuant to the ThirdAmended and Restated Revolving Credit Agreement, dated November 17, 2008(the “Amended Revolving Credit Agreement”), Charter Mx LLC, Denham and fourmembers of our senior management team agreed to provide bridge financing in anaggregate amount of $10.4 million by becoming lenders in a new bridge loantranche under the Amended Revolving Credit Agreement (the “Bridge Financing”).  Bridge Financing loan amounts were asfollows: (1) $5.0 million each from Charter Mx LLC and Denham; and (2) $0.1million each from Jeffrey A. Mayer, Chief Executive Officer; Steven Murray,Chief Operating Officer; Carole R. Artman-Hodge, Executive Vice President; andChaitu Parikh, Chief Financial Officer. An upfront fee of 2% of the respective loan amount was paid to eachBridge Financing lender upon closing.

 

The Bridge Financing loanfrom Charter Mx LLC was repaid in April 2009.  The remaining Bridge Financing loans wererepaid on September 22, 2009.

 

***Redeemable Convertible Preferred Stock***

 

On June 30, 2004,MXenergy Inc. entered into a purchase agreement (the “Preferred Stock PurchaseAgreement”) with Preferred Investors to issue 1,451,310 shares of PreferredStock at a purchase price of $21.36 per share. In 2005, as part of a corporate reorganization, MXenergy Inc. mergedwith and into a subsidiary of Holdings to become a wholly owned subsidiary ofHoldings and stockholders of MXenergy Inc. became stockholders ofHoldings.  Total related offeringexpenses of approximately $1.6 million were deducted from the carrying value ofthe Preferred Stock, which resulted in a net carrying value of approximately$29.4 million at June 30, 2007.

 

On or after the fifthanniversary of the issuance of the Preferred Stock, if the fair market value ofour common stock is at a level that would not provide the Preferred Investorswith an annual rate of return of at least 25%, compounded annually, for thefive-year period ending June 30, 2009, the Preferred Investors had theright to require that we make a redemption election.  If the holders of the Preferred Stockrequired us to make a redemption election, and if we elected to redeem thePreferred Stock, the redemption amount would have been payable in cash equal tothe greater of: (1) the fair market value of the shares of common stockinto which the Preferred Stock could have been converted on the date of theredemption election notice; or (2) the original issue price of $21.36 pershare, plus any accrual of dividends.  Ifwe elected not to redeem the Preferred Stock, we would have been required togrant the Preferred Investors effective control over Holding’s Board of 

 

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Directors.  As of June 30, 2009 and 2008, if theholders of Preferred Stock were to request that we make a redemption election,we did not have the intent or the ability to redeem the Preferred Stock due tolimitations included in the agreements that governed the Revolving CreditFacility, the Hedge Facility and the Floating Rate Notes due 2011.  We determined that the Preferred Stock wasredeemable at the option of the Preferred Investors and that it is probablethat the Preferred Stock became redeemable at June 30, 2009.  Therefore the carrying value of the PreferredStock was recorded outside of stockholders’ equity on the consolidated balancesheet and was adjusted to its estimated redemption value of $54.6 million as ofJune 30, 2009.  As of June 30,2009, the holders of Preferred Stock did not make an election to redeem thePreferred Stock.

 

On September 22,2009, all outstanding shares of Preferred Stock were exchanged for 11,862,551shares of newly authorized Class C Common Stock, which represented 21.84%of the aggregate total shares of our common stock outstanding afterconsummation of the Restructuring.  Theexcess of the redemption value over the aggregate fair value of common stockissued to the holders of Preferred Stock was recorded as an increase toretained earnings on the consolidated balance sheets on the consummation dateof the Restructuring.

 

**Resultsof Operations**

 

***GrossProfit by Business Segment***

 

Gross profit by businesssegment is summarized in the following table. For purposes of this analysis, gross profit includes fee income andrealized losses from risk management activities, but excludes unrealized gains(losses) from risk management activities. 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.

 
| ** **                                                                        | ** ** | ** **                          | ** **  | ** **              | ** ** | ** **              | ** ** | **2009 versus 2008** | ** **    | **2008 versus 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------|-------------|-------------------------|------------|-------------------------|------------|----------------------|---------------|----------------------|------------|
| ** **                                                                        | ** ** | **Fiscal Year Ended June 30,** | ** **  | **Increase (Decrease)** | ** ** | **Increase (Decrease)** | ** ** |
| **Business Segment**                                                              | ** ** | **2009**                            | ** **  | **2008**                | ** ** | **2007**                | ** ** | **Amount**           | ** **    | **%**                | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                                                                        | ** ** | **($ in thousands)**           | ** **  |
|                                                                              |       |                                |        |                    |       |                    |       |                 |          |                 |       |   |   |   |   |
| Natural  Gas                                                                      | ** ** | **$**                               | **97,968**  |                    | $          | 105,303                 |       | $                    | 115,280       |                 | $          | (7,335 | ) | (7) |   | $ | (9,977 | ) | (9 | ) |
| Electricity                                                                       | ** ** | **22,241**                          |        | 10,227                  |       | 3,579                   |       | 12,014               |          | 117                  |       | 6,648 |   | 186 |   |
| Total  gross profit before unrealized losses from risk management activities, net | ** ** | **$**                               | **120,209** |                    | $          |  115,530           |       | $                    |  118,859 |                 | $          | 4,679 |   | 4 |   | $ |  (3,329 | ) | (3 | ) |

 

**FiscalYear Ended June 30, 2009 Versus 2008**

 

***Natural Gas Gross Profit***

 

*RealizedLosses from Risk Management Activities, Net, That Relate to Natural GasInventories Not Yet Sold*

 

As we do not performhedge accounting, realized gains (losses) from risk management activities, netincludes net gains (losses) related to the settlement of risk managementactivities associated with natural gas inventories not yet sold.  Offsetting net increases (decreases) in grossprofit are generally realized in future periods as these inventories are sold.

 

During fiscal year 2009,we recorded approximately $13.2 million of realized losses related tosettlement of risk management activities associated with natural gasinventories, as compared to realized gains of approximately $4.8 million forfiscal year 2008, resulting in a net $18.0 million ($0.33 per MMBtu of naturalgas sold) negative comparative impact on gross profit for the current period.

 

*WeightedAverage Cost of Gas*

 

Our application ofweighted average cost accounting to the valuation of natural gas inventoryassumes that all purchases of natural gas are initially capitalized as naturalgas 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 period is less than the weighted average costper MMBtu of storage inventory at the beginning of the period, the weightedaverage cost per unit of storage inventory will be lower at the end of theperiod than at the beginning of the period. The reduction in inventory value per MMBtu deferred in the balance sheetbetween the 

 

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beginning and end of anoperating period is reflected as an increase in cost of natural gas sold in theconsolidated statement of operations for the period.

 

Conversely, for operatingperiods during which natural gas prices per MMBtu are greater during the periodthan the weighted average cost of storage inventory at the beginning of thatperiod, the weighted average cost per unit of storage inventory will be higherat the end of the period than at the beginning of the period, resulting inlower cost of natural gas inventory sold for that period.

 

The impacts describedabove on the weighted average cost of gas are more pronounced in periods wherewe inject storage gas and have an increase in storage volume from the beginningto the end of the period.

 

Significantly lowermarket prices for natural gas during fiscal year 2009 reduced the carryingvalue of opening natural gas inventories that are economically hedged bycustomer contracts and/or derivative instruments and lowered our gross profitby approximately $0.8 million during fiscal year 2009.  By comparison, higher gross profit ofapproximately $1.4 million resulted from increased market prices for naturalgas during fiscal year 2008.  Thecomparative net impact was a decrease in natural gas gross profit ofapproximately $2.2 million ($0.04 per MMBtu sold) for fiscal year 2009.

 

*VolumeImpact*

 

The volume of natural gasMMBtus sold was approximately 1% higher for fiscal year 2009, as compared withthe same period in the prior fiscal year. Lower average RCEs were offset by higher heating degree days duringfiscal year 2009.  Higher volumes ofnatural gas sold resulted in higher natural gas gross profit of approximately$0.7 million for fiscal year 2009, as compared with the prior fiscal year.

 

*FeeIncome*

 

Our gross margin includesfee income charged to customers, primarily in our Georgia natural gas market,for monthly service, late payment and shut-off/reconnect service.  Fee income was $2.0 million higher for fiscalyear 2009, as compared with the prior fiscal year, due primarily to increasedlate payment and service termination fees in these markets.

 

*FavorablePrice Environment*

 

The net impacts describedabove were partially offset by higher gross profit per MMBtu sold resultingfrom a favorable pricing environment in many of our markets, particularly forour variable price accounts.

 

***Electricity Gross Profit***

 

Higher electricity sales and gross profit were primarily driven byhigher average electricity RCEs, which increased 28% during fiscal year 2009, ascompared with the prior fiscal year, resulting in significantly higher volumeof MWhrs sold.  The main driver forhigher average RCEs was significant organic customer growth in our Texas,Connecticut and New York market areas, which was largely due to targeted directsales marketing activities during fiscal year 2008 and the first three monthsof fiscal year 2009 and a wider range of products offered to customers.  Higher gross profit per MWhr sold alsocontributed to the overall increase in electricity gross profit.

 

**FiscalYear Ended June 30, 2008 Versus 2007**

 

***Natural Gas Gross Profit***

 

Average natural gas RCEsdecreased 1% for fiscal 2008, which was the primary driver for 5% lower volumeof natural gas MMBtus sold during fiscal 2008, as compared with the priorfiscal year.  Natural gas gross profitper MMBtu sold decreased 4% for the fiscal year ended June 30, 2008, ascompared with the prior fiscal year. Several factors contributed to the overall decrease in natural gas grossprofit and gross profit per MMBtu sold.

 

*VolumeImpact*

 

The volume of natural gasMMBtus sold was 5% lower for the fiscal year ended June 30, 2008, ascompared with the prior fiscal year.  Inaddition to lower average natural gas RCEs, higher than normal temperatures inGeorgia, our largest natural gas market, also contributed to lower volumes ofnatural gas sold.  The reduction in grossprofit associated with lower volumes of natural gas sold was approximately $4.8million for the fiscal year ended June 30, 2008.

 

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*VariableRate Plan Pricing Impact on Gross Profit*

 

During fiscal year 2007,particularly during the three months ended March 31, 2007, we were able toacquire natural gas at market prices that were generally lower than theweighted average cost of gas of competing utilities within various natural gasmarkets where: (1) we have variable priced customers; (2) the localutility is a competitor; and (3) we do not own natural gas storageinventory.  In these markets, we wereable to set variable rate prices at the higher end of the competitive range andstill price below those prices offered by most local utilities, thus allowingus to realize higher gross profit on variable rate products than those realizedfor fiscal year 2007.  In contrast,natural gas prices increased significantly during fiscal year 2008, whichprevented us from realizing comparable gross profit for variable rate productsoffered in these same markets.

 

*Impactof SESCo Acquisition*

 

Our results for fiscalyear ended June 30, 2008 include a full twelve months of natural gas grossprofit related to the operations of Shell Energy Services Company L.L.C. (“SESCo”),which we acquired in August 2006, while our results for fiscal year 2007include only eleven months of this activity.

 

*WeightedAverage Cost of Gas*

 

Our application ofweighted average cost accounting to the valuation of natural gas inventoryassumes that all purchases of natural gas are initially capitalized as naturalgas 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 period is less than the weighted average costper MMBtu of storage inventory at the beginning of the period, the weightedaverage cost per unit of storage inventory will be lower at the end of theperiod 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 of operationsfor the period.

 

Conversely, for operatingperiods during which natural gas prices per MMBtu are greater during a periodthan the weighted average cost of storage inventory at the beginning of thatperiod, the weighted average cost per unit of storage inventory will be higherat the end of the period than at the beginning of the period, resulting inlower cost of natural gas inventory sold for that period.

 

The impacts describedabove on the weighted average cost of gas are more pronounced in periods wherewe inject storage gas and have an increase in storage volume from the beginningto the end of the period.  March 31represents the end of the annual storage inventory cycle.  As such, any weighted average cost of gasimpact reflected through December 31 of each fiscal year is assumed to berealized through operations during the quarter ended March 31, as ourstorage inventory reaches its low point for the year and we prepare to beginthe next injection cycle in April.

 

The effect on theweighted average cost of gas reflected through June 30, 2007 thatbenefited our results for the fiscal year ended June 30, 2008 exceeded thebenefit for the comparable period in the prior year by approximately $2.6million.

 

*RealizedLosses from Risk Management Activities, Net, That Relate to Natural GasInventories Not Yet Sold*

 

As we do not performhedge accounting, realized gains (losses) from risk management activitiesincludes net losses related to the settlement of risk management activitiesassociated with natural gas inventories. Offsetting net increases in gross profit should be realized in futureperiods as these inventories are sold.

 

During the fiscal yearended June 30, 2008, we recorded approximately $4.8 million of realizedgains related to settlement of risk management activities associated withnatural gas inventories, as compared to realized losses of $1.1 million for theprior fiscal year, resulting in a net $5.9 million positive comparative impacton natural gas gross profit.

 

*FeeIncome*

 

Our gross profit includesfee income charged to customers primarily in Georgia, including monthly servicefees, late payment fees and shut-off/reconnect service fees.  Fee income was $1.7 million higher for thefiscal year ended June 30, 2008, as compared with the prior fiscalyear.  Higher fee income resultedprimarily from growth in the number of electricity customers, the GasKeyAcquisition in January 2008, and the inclusion of an additional month ofSESCo operations in fiscal year 2008 compared to fiscal year 2007.

 

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***Electricity Gross Profit***

 

Average electricity RCEsgrew approximately 240% to approximately 68,000 for fiscal 2008, resulting insignificantly higher volume of MWhrs sold.

 

The Vantage Acquisitionduring the final three months of fiscal 2007 added approximately 12,000electricity RCEs and established a presence for us in Texas.  The main driver for higher electricity RCEsduring fiscal 2008 was significant organic growth in our Texas, Massachusetts,Connecticut and New York market areas, which was largely due to targeted directsales marketing activities and a wider range of products offered to customers.

 

Electricity gross profitper MWhr sold decreased 13% for the fiscal year ended June 30, 2008, ascompared with the prior fiscal year.  Asnoted above, we have experienced significant growth in our Texas markets, whereour average gross profit is generally lower due to the fact that our customersin this market are predominantly commercial and industrial accounts.  Introductory rates offered to new customersin our Northeastern U.S. markets, where we also experienced growth, alsocontributed to lower overall gross profit per MWhr sold.

 

In September 2008,Hurricane Ike caused extensive damage to the infrastructure for generating anddelivering electricity to residential and commercial end-users along theeastern coast of Texas, which resulted in disruption of electricity service forHouston, Texas and the surrounding area. Hurricane Ike did not have a material impact on our operations duringfiscal year 2009.

 

***OperatingExpenses***

 

Operating expenses aresummarized in the following table.

** **
| ** **                           | ** ** | ** **                          | ** **  | ** **                     | ** ** | ** **                     | ** ** | **2009 versus 2008** | ** ** | **2008 versus 2007** | ** ** |
|--------------------------------------|------------|-------------------------------------|-------------|--------------------------------|------------|--------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                           | ** ** | **Fiscal Year Ended June 30,** | ** **  | **Increase********(Decrease)** | ** ** | **Increase********(Decrease)** | ** ** |
| **Business Segment**                 | ** ** | **2009**                            | ** **  | **2008**                       | ** ** | **2007**                       | ** ** | **Amount**           | ** ** | **%**                | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **($ in thousands)**           | ** **  |
|                                 |       |                                |        |                           |       |                           |       |                 |       |                 |       |   |   |   |   |
| General  and administrative expenses |       | $                                   | **59,957**  |                           | $          | 62,271                         |       | $                    | 54,516     |                 | $          | (2,314 | ) | (4 | ) | $ | 7,755 |   | 14 |   |
| Advertising  and marketing expenses  | ** ** | **2,117**                           |        | 4,546                          |       | 4,044                          |       | (2,429               | )          | (53                  | )          | 502 |   | 12 |   |
| Reserves  and discounts              | ** ** | **15,130**                          |        | 7,130                          |       | 4,725                          |       | 8,000                |       | 112                  |       | 2,405 |   | 51 |   |
| Depreciation  and amortization       | ** ** | **37,575**                          |        | 32,698                         |       | 27,730                         |       | 4,877                |       | 15                   |       | 4,968 |   | 18 |   |
| Total  operating expenses            |       | $                                   | **114,779** |                           | $          |  106,645                  |       | $                    | 91,015     |                 | $          | 8,134 |   | 8 |   | $ | 15,630 |   | 17 |   |

 

**General and Administrative Expenses**

 

General andadministrative expenses are summarized in the following table.

 
| ** **                                 | ** ** | ** **                          | ** **       | ** **                           | ** ** | ** **                     | ** ** | **2009 versus 2008** | ** **   | **2008 versus 2007** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------------|--------------------------------------|------------|--------------------------------|------------|----------------------|--------------|----------------------|------------|
| ** **                                 | ** ** | **Fiscal Year Ended June 30,** | ** **       | **Increase******** (Decrease)** | ** ** | **Increase********(Decrease)** | ** ** |
| **Business Segment**                       | ** ** | **2009**                            | ** **       | **2008**                             | ** ** | **2007**                       | ** ** | **Amount**           | ** **   | **%**                | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                                 | ** ** | **($ in thousands)**           | ** **       |
|                                       | ** ** | ** **                          |             |                                 |       |                           |       |                 |         |                 |       |   |   |   |   |
| Salaries  and employee benefits            |       | $                                   |  **33,644** |                                 | $          |  36,007                   |       | $                    |  33,039 |                 | $          |  (2,363 | ) | (7 | ) | $ |  2,968 |   | 9 |   |
| Professional  fees                         | ** ** | **7,998**                           |             | 9,360                                |       | 5,425                          |       | (1,362               | )            | (15                  | )          | 3,935 |   | 73 |   |
| Other  general and administrative expenses | ** ** | **18,315**                          |             | 16,904                               |       | 16,052                         |       | 1,411                |         | 8                    |       | 852 |   | 5 |   |
| Total  general and administrative expenses |       | $                                   |  **59,957** |                                 | $          |  62,271                   |       | $                    |  54,516 |                 | $          |  (2,314 | ) | (4 | ) | $ |  7,755 |   | 14 |   |

 

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

 

Throughout fiscal year2008, we incurred significant incremental general and administrative expensesrelated to initiatives to enhance our corporate finance, billing, accountingoperations, customer service, information technology, marketing and supply functionsin support of business growth.  Inaddition, we increased our staff count and incurred other incremental costs toenhance 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 

 

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incremental costs infiscal year 2008 have not recurred during fiscal year 2009, resulting ingenerally lower general and administrative expenses.

 

In March 2008, theCompensation Committee of our Board of Directors approved the issuance of19,000 total shares of common stock to two of our senior executives.  Total compensation expense related toissuance of these shares was approximately $1.7 million, which included thefair value of the common stock issued and additional compensation to offset thetaxable nature of the shares to the employees. Excluding the impact of the compensation expense from issuance of theseshares in fiscal year 2008, salaries and employee benefits decreased $0.7million (2%) during fiscal year 2009, as compared with the prior fiscal year.  Salaries and employee benefits include thecost of contracted services to supplement our employees in certaindepartments.  Lower salaries and relatedexpenses during fiscal year 2009 are primarily due to lower contracted servicescosts.

 

Higher other general andadministrative expenses during fiscal year 2009 were primarily due to generallyhigher customer care and billing related expenses.

 

***Fiscal Year Ended June 30, 2008 Versus 2007***

 

As a result of the SESCoAcquisition, we implemented a restructuring plan to move certain of ouroperations to Houston, Texas, beginning in the three months ended September 30,2006.  During the fiscal year ended June 30,2007, we incurred $1.2 million of charges (primarily severance, retentionbonuses and reimbursement of relocation costs) related to this plan.  Also during fiscal 2007, we paid $0.8 millionof bonuses to senior executives in recognition of their work on the SESCoAcquisition.

 

In March 2008, theCompensation Committee of our Board of Directors approved the issuance of19,000 total shares of common stock to two of our senior executives.  Total compensation expense related toissuance of these shares was approximately $1.7 million, which included thefair value of the common stock issued and additional compensation to offset thetaxable nature of the shares to the employees.

 

During fiscal year 2008,we incurred an additional month of expenses, as compared to the prior fiscalyear, related to the operations of SESCo, which were acquired effective August 1,2006.

 

Excluding the impact ofrestructuring charges, bonuses and compensation expense from issuance of sharesdescribed above, general and administrative expenses increased $8.1 million(15%) for the fiscal year ended June 30, 2008 as compared with the prior fiscalyear.  Throughout fiscal 2008, wecontinued various initiatives to enhance our corporate finance, billing,accounting operations, customer service, information technology, marketing andsupply functions in support of business growth experienced during fiscal2007.  In addition, we increased ourstaff headcount and incurred other costs to enhance our overall internalcontrol environment, including our information technology and financialreporting controls.  The impacts of theseinitiatives include:

 

·                  Higher staffing levels, salaries,employee benefits, recruiting fees, professional fees and other generalexpenses related to expanding our customer billing, collections and customerservices functions;

·                  Higher staffing levels, salaries,employee benefits and recruiting fees related to enhancing our overall internalcontrols environment for various corporate accounting and reporting functions;

·                  Higher professional fees related tosupporting our development of a formalized internal audit function and ourongoing development of an internal controls environment that complies with theSarbanes-Oxley Act of 2002; and

·                  Higher information technology expensesrelated to business growth and process improvement initiatives.  The principal objectives of these initiativesinclude the integration of our legacy operations onto the customer relationshipmanagement system that served SESCo and the implementation of internal controlsas described above.

 

**Advertising and Marketing Expenses**

 

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

 

As part of an overallcorporate strategy to manage our liquidity position, and in response toamendments to our Revolving Credit Facility and Hedge Facility that placedlimitations on amounts that we could spend on marketing activities and on theproducts we could offer to our customers, we intentionally curtailed our levelof sales and marketing activity, resulting in significantly lower advertisingand marketing expenses during fiscal year 2009, as compared with prior fiscalyear.

 

***Fiscal Year Ended June 30, 2008 Versus 2007***

 

During the three monthsended September 30, 2007, we incurred significant expenses related to amulti-media campaign 

 

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designed to support ourdirect sales activities in the Georgia market. Multi-media marketing expenditures slowed significantly during the ninemonths subsequent to September 30, 2007 after the Georgia campaign wascompleted.

 

Marketing expenses werelower for the final nine months of fiscal 2008 as a result of higher deferralsof customer acquisition costs, as compared with the prior fiscal year.  During fiscal 2008, we shifted our marketingfocus and resources towards direct sales and marketing activities.  Much of the cost associated with thesemarketing channels are deferred as customer acquisition costs on ourconsolidated balance sheet and amortized over a three-year estimated benefitperiod, which resulted in lower marketing expenses and partially offset highermulti-media advertising expenses during the first three months of fiscal year2008.

 

**Reserves and Discounts**

 

Reserves and discountsare summarized in the following table.

 
| ** **                                                                    | ** ** | ** **                          | ** ** | ** **                           | ** ** | ** **                     | ** ** | **2009 versus 2008** | ** ** | **2008 versus 2007** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                    | ** ** | **Fiscal Year Ended June 30,** | ** ** | **Increase******** (Decrease)** | ** ** | **Increase********(Decrease)** | ** ** |
| **Business Segment**                                                          | ** ** | **2009**                            | ** ** | **2008**                             | ** ** | **2007**                       | ** ** | **Amount**           | ** ** | **%**                | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                                                                    | ** ** | **($ in thousands)**           | ** ** |
|                                                                          |       |                                |       |                                 |       |                           |       |                 |       |                 |       |   |   |   |   |
| Provision  for doubtful accounts                                              |       | $                                   | **12,009** |                                 | $          | 5,050                          |       | $                    | 3,018      |                 | $          | 6,959 |   | 138 |   | $ | 2,032 |   | 67 |   |
| Contractual  discounts for LDC guarantees of customer accounts receivable (1) | ** ** | **3,121**                           |       | 2,080                                |       | 1,707                          |       | 1,041                |       | 50                   |       | 373 |   | 22 |   |
| Total  reserves and discounts                                                 |       | $                                   | **15,130** |                                 | $          | 7,130                          |       | $                    | 4,725      |                 | $          | 8,000 |   | 112 |   | $ | 2,405 |   | 51 |   |

 

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

 

Accounts receivableincludes cash imbalance settlements that represent the value of excess naturalgas delivered to LDCs for consumption by our customers and actual customerusage.   Historically, we have collected100% of these imbalance settlement receivables. However, as a result of a bankruptcy filing by a retail marketer inGeorgia in October 2008, the collection of our imbalance receivableposition in Georgia was placed at risk. A preliminary settlement proposal offered in March 2009 forresolution of the imbalance receivable resulted in us recording an incrementalprovision for bad debt expense of approximately $0.6 million during fiscal year2009.

 

Excluding the impact ofthe Georgia imbalance settlement, the higher provision for doubtful accountsfor fiscal year 2009 was primarily due to:

 

·                  higher revenue during fiscal year 2009 inour largest non-guaranteed natural gas market in Georgia and in ournon-guaranteed electricity market in Texas. Total sales of natural gas and electricity for these markets increased acombined 7% during fiscal 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.

 

We continue to monitoreconomic conditions and collections experience in our markets in order toassess appropriate levels of our allowance for doubtful accounts.

 

Higher contractualdiscounts for LDC guarantees of customer accounts receivable during fiscal year2009, as compared with the prior fiscal year, are due to generally higher salesof natural gas and electricity within our LDC guaranteed markets and to ahigher weighted-average contractual discount rate.  Total revenues within these markets increasedapproximately 9% during fiscal year 2009, as compared to the prior fiscal year,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.

 

***Fiscal Year Ended June 30, 2008 Versus 2007***

 

Higher provision for doubtfulaccounts for the fiscal year ended June 30, 2008 was partially due tohigher total sales recorded for the period, and partially due to a higherconcentration of revenues and receivables in the Georgia natural gas marketsand Texas electricity markets for which we perform the billing function.  In relation to sales revenue, our provisionand allowance for doubtful accounts are higher in these markets due tohistorical levels of bad debts that are generally higher than that for othermarkets that we serve.  The provision fordoubtful accounts was less than 1% of sales of natural gas and electricity for 

 

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each of the fiscal yearsended June 30, 2008 and 2007.

 

**Depreciation and Amortization**

 

Depreciation andamortization expenses are summarized in the following table.

 
| ** **                                  | ** ** | ** **                          | ** ** | ** **                     | ** ** | ** **                     | ** ** | **2009 versus 2008** | ** ** | **2008 versus 2007** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **Fiscal Year Ended June 30,** | ** ** | **Increase********(Decrease)** | ** ** | **Increase********(Decrease)** | ** ** |
| **Business Segment**                        | ** ** | **2009**                            | ** ** | **2008**                       | ** ** | **2007**                       | ** ** | **Amount**           | ** ** | **%**                | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                                  | ** ** | **($ in thousands)**           | ** ** |
|                                        |       |                                |       |                           |       |                           |       |                 |       |                 |       |   |   |   |   |
| Depreciation  of fixed assets               |       | $                                   | **7,787**  |                           | $          | 9,274                          |       | $                    | 8,179      |                 | $          | (1487 | ) | (16 | ) | $ | 1,095 |   | 13 |   |
| Amortization  of customer acquisition costs | ** ** | **29,777**                          |       | 23,414                         |       | 19,540                         |       | 6,363                |       | 27                   |       | 3,874 |   | 20 |   |
| Other  amortization expense                 | ** ** | **11**                              |       | 10                             |       | 11                             |       | 1                    |       | 10                   |       | (1 | ) | (9 | ) |
| Total  depreciation and amortization        |       | $                                   | **37,575** |                           | $          | 32,698                         |       | $                    | 27,730     |                 | $          | 4,877 |   | 15 |   | $ | 4,968 |   | 18 |   |

 

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

 

During fiscal year 2008,we shifted our marketing focus and resources towards direct sales and marketingactivities.  Much of the cost associatedwith these direct marketing channels during fiscal years 2009 and 2008 weredeferred as customer acquisition costs on our consolidated balance sheet andare being amortized over a three-year estimated benefit period.  Higher amortization expense for fiscal year2009 was primarily due to these higher deferrals of direct marketing costs.

 

***Fiscal Year Ended June 30, 2008 Versus 2007***

 

Depreciation andamortization expense includes depreciation of fixed assets and amortization ofcustomer acquisition costs.  Expenses forthe fiscal year ended June 30, 2008 include an additional month ofdepreciation and amortization expense associated with fixed assets and customeracquisition costs related to the SESCo Acquisition, which was completed on August 1,2006.  Higher balances of customeracquisition costs have also resulted in higher amortization expense.

 

**InterestExpense, net**

 

Interest expense issummarized in the following table.

 
| ** **                                                 | ** ** | ** **                          | ** ** | ** **                           | ** ** | ** **                     | ** ** | **2009 versus 2008** | ** ** | **2008 versus 2007** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                 | ** ** | **Fiscal Year Ended June 30,** | ** ** | **Increase******** (Decrease)** | ** ** | **Increase********(Decrease)** | ** ** |
| **Business Segment**                                       | ** ** | **2009**                            | ** ** | **2008**                             | ** ** | **2007**                       | ** ** | **Amount**           | ** ** | **%**                | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                                                 | ** ** | **($ in thousands)**           | ** ** |
|                                                       |       |                                |       |                                 |       |                           |       |                 |       |                 |       |   |   |   |   |
| Interest  accrued on Floating Rate Notes due 2011          |       | $                                   | **16,834** |                                 | $          | 20,983                         |       | $                    | 21,222     |                 | $          | (4,149 | ) | (20 | ) | $ | (239 | ) | (1 | ) |
| Interest  rate swaps activity:                             |       |                                |       |                                 |       |                           |       |                 |       |                 |       |   |   |   |   |
| Change  in fair market value (1)                           | ** ** | **3,693**                           |       | 3,291                                |       | 856                            |       | 402                  |       | 12                   |       | 2,435 |   | 284 |   |
| Interest  accrued                                          | ** ** | **1,306**                           |       | 1,674                                |       | 287                            |       | (368                 | )          | (22                  | )          | 1,387 |   | 483 |   |
| Interest  and fees on Revolving Credit Facility (2)        | ** ** | **7,809**                           |       | 3,021                                |       | 3,052                          |       | 4,788                |       | 158                  |       | (31 | ) | (1 | ) |
| Interest  and fees on Hedge Facility (3)                   | ** ** | **2,207**                           |       | 2,421                                |       | 3,692                          |       | (214                 | )          | (9                   |       | (1,271 | ) | (34 | ) |
| Interest  accrued on Denham Credit Facility                | ** ** | **813**                             |       | 528                                  |       | 565                            |       | 285                  |       | 54                   |       | (37 | ) | (7 | ) |
| Other,  primarily amortization of deferred financing costs | ** ** | **13,073**                          |       | 5,993                                |       | 7,642                          |       | 7,080                |       | 118                  |       | (1,649 | ) | (22 | ) |
| Total  interest expense                                    | ** ** | **45,735**                          |       | 37,911                               |       | 37,316                         |       | 7,824                |       | 21                   |       | 595 |   | 2 |   |
| Less:  interest income                                     | ** ** | **(430**                            | **)**      | (3,806                               | )          | (4,258                         | )          | 3,376                |       | (89                  | )          | 452 |   | (11 | ) |
| Interest  expense, net                                     |       | $                                   | **45,305** |                                 | $          | 34,105                         |       | $                    | 33,058     |                 | $          | 11,200 |   | 33 |   | $ | 1,047 |   | 3 |   |

 

----

| (1) | We utilize interest  rate swap agreements to manage exposure to interest rate fluctuations on the  Floating Rate Notes due 2011. Mark-to-market adjustments and interest expense  associated with these swap arrangements are recorded as adjustments to  interest expense, net.                                                                                                                                                  |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes interest  expense associated with cash draws and Bridge Financing loans under the  Revolving Credit Facility. In addition, we utilize the Revolving Credit  Facility to post letters of credit related to activity under our Hedge  Facility, commodity supplier agreements, transportation and storage  agreements. Fees and interest expense associated with letters of credit are  also recorded as interest expense. |
| (3) | Represents fees  charged by the hedge provider related to forward-hedged commodity volumes  under the Hedge Facility.                                                                                                                                                                                                                                                                                                             |

 

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**FiscalYear Ended June 30, 2009 Versus 2008**

 

Lower interest accrued onthe Floating Rate Notes due 2011 was primarily due to a lower average interestrate, which decreased to 10.02% for fiscal year 2009 from 11.95% for fiscalyear 2008.  The average aggregate balanceof Floating Rate Notes due 2011 outstanding also decreased to $165.2****million for fiscal year 2009, as compared to $172.4 millionfor fiscal year 2008, as a result of our purchases of Floating Rate Notes due2011 during fiscal year 2008.

 

Higher interest and feesrelated to the Revolving Credit Facility are due to the following 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 governs the RevolvingCredit Facility during fiscal year 2009; and

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

 

During fiscal year 2009,we negotiated several amendments to our Hedge Facility and our Revolving CreditFacility.  Approximately $8.7 million offees associated with these amendments were deferred during fiscal year 2009 foramortization over the remaining amended term of the facilities.  Incremental interest expense of $7.5 millionfor fiscal year 2009 was a direct result of amortization of these deferredcosts.

 

Lower interest income wasa direct result of lower average cash and cash equivalents and restricted cashbalances during fiscal year 2009 as well as a lower average interest rateearned during the year, as compared to the same period in fiscal year 2008.

 

**FiscalYear Ended June 30, 2008 Versus 2007**

 

Interest expenseassociated with the Floating Rate Notes due 2011 increased $3.6 million infiscal 2008.  The Floating Rate Notes due2011 were issued in connection with the SESCo Acquisition, which was completedin August 2006.  We incurred a fulltwelve months of interest expense related to the Floating Rate Notes due 2011during the fiscal year ended June 30, 2008, as compared with eleven monthsof interest expense incurred during fiscal 2007, which resulted inapproximately $1.9 million of additional interest expense for fiscal year 2008.

 

We utilize interest rateswap agreements to manage exposure to interest rate fluctuations on theFloating Rate Notes due 2011. Mark-to-market adjustments and interest expense associated with theseswap arrangements are recorded as adjustments to interest expense, net.  Changes in the market value and higherinterest expense related to interest rate swaps resulted in an overall increaseof $3.8 million to interest expense, net for the fiscal year ended June 30,2008, as compared with the prior fiscal year.

 

Excluding the impacts noted above of themark-to-market adjustments and interest on the interest rate swaps and theadditional month of interest during the fiscal year ended June 30, 2008,interest expense related to the Floating Rate Notes due 2011 decreasedapproximately $1.7 million during the fiscal year ended June 30, 2008, ascompared with the prior fiscal year.  Theweighted-average interest rate on the Floating Rate Notes due 2011 decreased to11.95% for fiscal 2008 from 12.97% for the prior fiscal year.  Lower average debt balances resulting fromour purchases of Floating Rate Notes due 2011 during fiscal 2008 and 2007 alsoresulted in generally lower interest expense on the Floating Rate Notes due 2011for fiscal 2008.

 

During August 2006,we utilized a bridge loan from two investment banks to finance the SESCoAcquisition.  The bridge loan was repaidwith proceeds from the sale of $190.0 million aggregate principal amount of theFloating Rate Notes due 2011.  Fees andinterest of $0.8 million associated with the bridge loan were charged tointerest expense during the fiscal year ended June 30, 2007.  There was no comparable expense recordedduring the fiscal year ended June 30, 2008.

 

We pay various fees toour hedge provider related to forward-hedged commodity volumes under the HedgeFacility.  These fees are deferred inother current assets on the consolidated balance sheets, and amortized tointerest expense over the period of the hedged transactions.  Total interest expense associated with thesefees was approximately $1.0 million and $2.8 million for the fiscal years endedJune 30, 2008 and 2007, respectively. Lower fees during fiscal year 2008 were primarily due to a lower volumeof fixed hedge positions.

 

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***IncomeTax (Expense) Benefit***

 

**FiscalYear Ended June 30, 2009 Versus 2008**

 

Our effective tax ratefor fiscal year 2009 was reduced to a benefit of 21.4% for fiscal year 2009from a charge of 40.9% for fiscal year 2008, primarily due to the impact of avaluation allowance recorded at June 30, 2009 against deferred tax assets,as described below, and changes in the mix and amounts of permanent differencesand to a lower state statutory tax rate as a result of income apportionment forthe states in which we do business.

 

The significantcomponents of the Company’s deferred tax assets and liabilities are summarizedin the following table.

 
| ** **                                             | ** ** | **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 |   |

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamount of assets and liabilities for financial reporting purposes and theamounts 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.

 

We have deferred taxassets related to unrealized losses from risk management activities.  We anticipate that these deferred tax assetswill be realized in future periods when sales of fixed price commodities, towhich the unrealized losses from risk management activities relate, occur.  Therefore, we did not establish a valuationallowance for these deferred tax assets.

 

For the remainingdeferred tax assets reflected in the table above, 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, we recorded valuation allowances of approximately $22.0million and $0.7 million related to our U.S. and Canadian operations, respectively,as a reduction of the tax benefit recorded for fiscal year 2009.

 

**FiscalYear Ended June 30, 2008 Versus 2007**

 

Income tax (expense)benefit increased to an expense of $17.2 million for the fiscal year ended June 30,2008 from a benefit of $8.5 million for fiscal year 2007, due to:

 

·                  the change to income before income tax expense of$42.0 million for the fiscal year ended June 30, 2008 from a loss beforeincome tax benefit  of $22.3 million forfiscal year 2007; and

·                  a higher effective tax rate for fiscal year 2008, duemainly to changes in the mix and amounts of permanent differences, which waspartially offset by a lower combined state statutory tax rate.

 

**Liquidityand Capital Resources**

 

Our principal sources ofliquidity for our ongoing operations are cash collected from sales of naturalgas and electricity to customers and borrowings under our creditfacilities.   Our primary liquidityrequirements arise primarily from our seasonal working capital needs, includingpurchases of natural gas inventories, collateral requirements related tosupplier, LDC, transportation and storage arrangements, acquisition ofcustomers and ongoing debt service obligations. Because we sell 

 

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natural gas andelectricity, we are subject to material variations in short-term indebtednessunder our credit facilities on a seasonal basis, due to the timing and price ofcommodity purchases to meet customer demands.

 

Asof June 30, 2009, and through September 21, 2009, we relied on thefollowing credit and commodity hedging arrangements to provide the liquiditynecessary for operation of our natural gas and electricity businesses:

 

·                  The RevolvingCredit Facility was used primarily to post letters of credit required toeffectively operate within the markets that we serve;

·                  The HedgeFacility was used as our primary facility to economically hedge variability inthe cost of natural gas; and

·                  Commodityderivative arrangements with various counterparties were used to economicallyhedge variability 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 the following materialdirect impacts on our liquidity position:

 

·                  The maturitydates of the Revolving Credit Facility and Hedge Facility were extended to September 2009.

·                  The maximumamount that could be borrowed under the Revolving Credit Facility was reducedfrom $280.0 million at June 30, 2008 to $115.0 million at June 30,2009, and $94.0 million effective July 31, 2009.

·                  We wererequired to actively seek a new facility to replace the Revolving CreditFacility and Hedge Facility.

·                  During fiscalyear 2009, we paid approximately $8.7 million of fees related to all amendmentsand extensions, which were deferred on the consolidated balance sheet and arebeing amortized as an increase to interest expense over the remaining terms ofthe Revolving Credit Facility and Hedge Facility.  During fiscal year 2009, we recordedapproximately $7.5 million of incremental interest expense resulting from amortizationof these deferred costs.

 

Giventhe negative conditions in the economy generally and the credit markets inparticular, there was substantial uncertainty that we would be able to secure arefinancing of the Revolving Credit Facility without a material restructuringof our debt and equity position.

 

On September 22, 2009, we consummatedthe Restructuring, which was intended to reduce our debt exposure and interestexpense, improve our liquidity and improve our financial and operationalflexibility in order to allow us to compete more effectively.  As a result of the Restructuring, wesignificantly decreased out outstanding debt obligations, which will result 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.  The Commodity Supply Facility provides uswith a stable source of liquidity for a minimum of three years with aninvestment grade counterparty. Significant terms of the Commodity Supply Facility are described below.

 

***Cash Flow***

 

During the fiscal yearended June 30, 2009, our cash and cash equivalents decreased $48.7 millionto a balance of $23.3 million at the end of the period.  Approximately $48.1 million of cash was usedfor operating activities during fiscal year 2009, which reflects a $39.5million change from the $8.6 million used in operations for fiscal year2008.  As a result of various amendmentsto the agreement that governs the Revolving Credit Facility during fiscal year2009, we were required to transfer $75.0 million of cash to a restrictedaccount to maintain as collateral for obligations under the Revolving CreditFacility, which resulted in a corresponding reduction in cash and cashequivalents.  This transfer to restrictedcash was partially offset by a $17.6 million increase in cash from operationsand by a $9.0 increase in operating cash from changes in customer accountsreceivable, natural gas inventories and other working capital activity.

 

During fiscal year 2009, cashwas also used in or provided by the following material investing and financingactivities:

 

·                  $15.3 million was used for investment incustomer acquisition costs throughout fiscal 2009;

·                  $12.0 million was provided by borrowingsunder the Denham Credit Facility in September 2008;

·                  $10.4 million was provided by BridgeFinancing under the Revolving Credit Facility in November 2008, of which$5.0 million was repaid in April 2009.

 

The Restructuringconsummated on September 22, 2009 resulted in the following materialsources and uses of cash and cash equivalents during the first quarter offiscal year 2010:

 

·                  $75.0 million of restricted cash wasreleased by the administrative agent under the Revolving Credit Facility andreturned to cash and cash equivalents;

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

·                  $18.5 million was transferred from cashand cash equivalents to restricted cash accounts established as collateral foractual and potential mark-to-market liabilities associated with commodity andinterest rate economic hedging activities;

·                  $12.5 million of principal and accruedinterest was paid to Denham to repay all obligations under the Denham CreditFacility;

·                  $9.0 million was transferred from cashand cash equivalents to a restricted cash account established as escrow forfuture interest payments related to the Fixed Rate Notes due 2014;

·                  $6.6 million of principal and interestwas paid to the Bridge Financing lenders to repay all obligations under theBridge Financing Loans;

·                  Approximately $5.0 million was paid tovarious parties for fees directly related to various transactions consummatedunder the Restructuring;

·                  $67.8 million aggregate principal amountof Fixed Rate Notes due 2014 were issued to bondholders in partial exchange fortheir Floating Rate Notes due 2011; and

·                  54,305,112 shares of newly authorizedcommon stock were issued to various parties.

 

***Revolving Credit Facility***

 

As of June 30, 2009,and through September 21, 2009, we utilized our Revolving Credit Facilityprimarily to post letters of credit required to effectively operate within themarkets that we serve.  At June 30,2009, the total availability under the 

 

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Revolving Credit Facilitywas $147.8 million, of which the maximum we could utilize was $115.0 million asa result of amendments to the Revolving Credit Facility during fiscal year2009.  As of June 30, 2009, $96.3million of availability was utilized in the form of outstanding letters ofcredit.  During the fiscal year ended June 30,2009, we drew $30.0 million of cash advances under the Revolving CreditFacility, all of which was repaid prior to June 30, 2009.  Total interest expense associated with thesecash borrowings was less than $0.1****million forthe fiscal year ended June 30, 2009. Other than the Bridge Financing loans described below, there were nocash borrowings outstanding under the Revolving Credit Facility at June 30,2009 or June 30, 2008.

 

The Revolving CreditFacility was replaced by the Commodity Supply Facility effective September 22,2009.

 

The sharp drop in naturalgas market prices during the first six months of fiscal year 2009 resulted in asignificant reduction in the available borrowing base under our RevolvingCredit Facility, which strained our ability to post letters of credit ascollateral with suppliers and hedge providers, resulting in waivers obtainedfrom lenders related to certain provisions included in the agreement thatgoverns the Revolving Credit Facility, and ultimately resulting in materialamendments to the agreement that governs the Revolving Credit Facility (the “2009Amendments”).

 

As a result of the 2009Amendments, we were required to actively seek a liquidity event, which may haveincluded one or more of the following: (1) the repayment in full of all ofthe obligations under the Revolving Credit Facility and the termination of therevolving commitments thereunder; or (2) an equity contribution to us inan amount no less than $75.0 million, which shall be made on terms andconditions satisfactory to the administrative agent and the majority lenders attheir sole discretion (a “Liquidity Event”). Various milestone events and dateswere established by the 2009 Amendments and were eventually met by the Company,all leading to development and consummation of the Restructuring on September 22,2009.

 

Other material impacts ofthe 2009 Amendments are summarized as follows:

 

·                  The maturity date of the Revolving Credit Facility was extended to September 21,2009 from December 19, 2008.

·                  The maximum amount that we could borrow under the Revolving CreditFacility was incrementally reduced from $280.0 million at June 30, 2008 to$115.0 million at June 30, 2009 and to $94 million from July 31, 2009through the termination date.

·                  In November 2008, we were required to obtain $10.4 million ofadditional debt financing from Denham Commodity Partners Fund LP (“Denham”) andCharter Mx LLC, both significant stockholders of the Company, and four membersof our senior management team.

·                  We were required to borrow the $12.0million available balance under the Denham Credit Facility by November 7,2008.

·                  The volume of natural gas that could bemaintained in inventory was limited to maximum amounts ranging from a maximumof: (a) 4.2 million MMBtus on any date from May 15, 2009 through May 31,2009; (b) 5.1 million MMBtus on any date during the month of June 2009;(c) 5.6 million MMBtus on any date during the month of July 2009; and6.1 million MMBtus effective for the period July 31, 2009 through thetermination date.

·                  Our marketing expenses were limited to:$0.2 million per week effective May 15, 2009.

·                  We were required to maintain a minimumcash balance with the administrative agent as security for all obligations ofthe Revolving Credit Facility, which increased from $60.0 million effective May 15,2009, to $65 million effective May 29, 2009, and to $75.0 millioneffective June 15, 2009 until termination of the Revolving Credit Facilityand cancellation of all letters of credit issued thereunder.

·                  Effective November 17, 2008, theaggregate outstanding principal amount of cash advances under the RevolvingCredit Facility was limited to $20.0 million. Effective March 11, 2009, our ability to obtain cash advances underthe Revolving Credit Facility was eliminated.

·                  Effective September 30, 2008, anyplan of the Company to acquire customer portfolios or operations of othercompanies required the explicit approval by lenders holding a majority of thecommitments under the Revolving Credit Facility.  Effective May 15, 2009, any acquisitionsof customer portfolios or operations of other companies were strictlyprohibited.

·                  We were temporarily allowed to exceed the maximum amount that can beborrowed under the Revolving Credit Facility by various amounts that decreasedincrementally from $35.0 million effective in November 2008 to $0effective in March 2009.

·                  From November 1, 2008 through November 17, 2008, we weretemporarily allowed to request issuance of letters of credit of up to$25,360,000 without deducting such letters of credit from the availableborrowing base.

·                  Amounts and terms of letters of creditthat we could request to be issued were progressively limited.

·                  Effective May 15, 2009, theaggregate amount of letters of credit that could be issued with an expirationdate beyond October 31, 2009 was limited to $40.0 million.

 

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·                  The margins added to base rate loans,various letter of credit fees and other facility fees were increased.

·                  Financial covenants related to consolidatedtangible net worth, consolidated working capital, interest coverage and allowednegative consolidated earnings were each amended.

·                  We were required to have at least $10.0million in available borrowing base on and after April 30, 2009.

·                  We were required to have at least $40.0million in cash and cash equivalents at all times on and after April 30,2009, excluding any such cash and cash equivalents acquired from the proceedsof advances under the Revolving Credit Facility.

·                  We paid approximately $8.7 million of amendment fees, legal fees andconsulting fees and other costs directly related to various amendments of theRevolving Credit Facility and the Hedge Facility during the fiscal year ended June 30,2009, which were deferred on the consolidated balance sheet and amortized overthe remaining terms of the facilities. Incremental interest expense associated with amortization of thesedeferred costs was approximately $7.5 million during fiscal year 2009.

 

On November 17,2008, Charter Mx LLC, Denham and four members our senior management team agreedto provide Bridge Financing in an aggregate amount of $10.4 million by becominglenders in a new bridge loan tranche under the Revolving Credit Facility.  Bridge Financing loan amounts were asfollows: (1) $5.0 million each from Charter Mx LLC and Denham; and (2) $0.1million each from Jeffrey A. Mayer, Chief Executive Officer; Steven Murray,Chief Operating Officer; Carole R. Artman-Hodge, Executive Vice President; andChaitu Parikh, Chief Financial Officer. An upfront fee of 2% of the respective loan amount was paid to eachBridge Financing lender upon closing.

 

The Bridge Financing loanfrom Charter Mx LLC was repaid, with accrued interest, in April 2009.  The remaining Bridge Financing loans from allother lenders were repaid, with accrued interest, on September 22,2009.  During fiscal year 2009, werecorded approximately $2.7 million of interest expense associated with theBridge Financing loans.

 

The agreement thatgoverned the Revolving Credit Agreement contained customary covenants thatrestricted certain of our activities including, among others, making capitalexpenditures, disposal of property and equipment, additional indebtedness,issuance of capital stock and payment of dividends.  We were in compliance with all such covenantsas of June 30, 2009, including the milestone events relating toreplacement of the Revolving Credit Facility and Hedge Facility.

 

***Hedge Facility***

 

As of June 30, 2009,and through September 21, 2009, although we engaged in economic hedgingactivities with various counterparties for electricity, we utilized the HedgeFacility as our primary natural gas hedge facility.  The Hedge Facility, which was governed by amaster transaction agreement (the “Master Transaction Agreement”), wasoriginally entered into on August 1, 2006 by and among MXenergy Inc.,MXenergy Holdings Inc. and certain subsidiaries thereof, as guarantors, and thehedge provider, and had an initial term of two years with subsequent one-yearrenewal terms.  As of June 30, 2009,all of our natural gas hedge positions under the Hedge Facility were with acounterparty that had an investment grade credit rating.

 

The Hedge Facility wasreplaced by the Commodity Supply Facility effective September 22, 2009.

 

Under the Hedge Facility,we utilized NYMEX-referenced over-the-counter swaps, basis price swaps and optionsto hedge the risk of variability in the cost of natural gas.  Until the termination of the Hedge Facility,we had the ability to enter into NYMEX and basis swaps through June 2010.Fees under the Hedge Facility included an annual management fee, a volumetricfee based on the tenor of the swap and other fees which allow the hedgeprovider to mitigate the potential risks arising from material declines ofnatural gas market prices based on our overall hedge position with theprovider.

 

During fiscal year 2009,the Master Transaction Agreement was amended several times to conform toprovisions of various amendments to the Revolving Credit Facility, includingthose relating to milestone events and dates associated with a Liquidity Event.

 

The Hedge Facility wassecured by a first lien on customer contracts and a second lien onsubstantially all other assets.  As of June 30,2008, we were required to post a $25.0 million letter of credit as collateralfor any potential negative mark-to-market changes in the value of our forwardhedge position.  Effective with a July 2008amendment to the Master Transaction Agreement, we were required to increase thecollateral required to be posted as margin to $35.0 million in the event thatthe negative mark-to-market value of our forward hedge position exceeds $25.0million.  We have the flexibility to posteither cash collateral or issue a letter of credit as collateral for the HedgeFacility.  As of June 30, 2009, wehad increased the letter of credit posted as collateral to $35.0 millionbecause our mark-to-market exposure under the Hedge Facility exceeded $25.0million.

 

Other material amendmentsto the Hedge Facility during fiscal year 2009 include:

 

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·                  The maturity date of the Hedge Facility was extended to September 21,2009 from July 31, 2008.

·                  Effective May 29, 2009, counterparties for any new natural gas transactionsrequired the approval of the hedge provider at its sole discretion.

·                  Effective May 29, 2009, the limitation on the maximum totaloutstanding hedging positions was reduced from a maximum of 25.0 million MMBtusin the original agreement that governs the Hedge Facility to 12.0 millionMMBtus effective May 29, 2009, to 11.0 million MMBtus effective July 31,2009, and to 10.0 million MMBtus effective August 31, 2009.

 

***Floating Rate Notes due 2011***

 

On August 4, 2006,we issued $190.0 million aggregate principal amount of Floating Rate Notesdue 2011, which mature on August 1, 2011 and bear interest at a rate equalto LIBOR plus 7.5% per annum.  Theinterest rate on the Floating Rate Notes due 2011 was 9.13% and 10.69% at June 30,2009 and 2008, respectively.  Theweighted-average interest rate was 10.02% and 11.95% for the fiscal years endedJune 30, 2009 and 2008, respectively. We have entered into interest rate swap agreements to hedge the floatingrate interest expense on the Floating Rate Notes due 2011.  Refer to “Item 3. Quantitative andQualitative Disclosures About Market Risk” below for additional informationregarding the interest rate swaps.

 

During fiscal year 2008and 2007, we purchased $12.8 million and $12.0 million, respectively, of aggregateprincipal amount of Floating Rate Notes due 2011, plus accrued interest, fromnoteholders for amounts less than face value. These transactions resulted in gains on early extinguishment of debt ofapproximately $0.8 and $1.0 million during fiscal years 2008 and 2007,respectively, which were recorded as reductions of interest expense.  We also recorded as additional interestexpense of $0.5 million and $0.6 million during fiscal years 2008 and 2007,respectively, representing a pro rata portion of original issue discount anddebt issuance costs that were deferred at the issuance date of the FloatingRate Notes due 2011.

 

As of June 30, 2009,we had $165.2 million aggregate principal amount of Floating Rate Notes due2011 outstanding.  On September 22,2009, we consummated an exchange offer of $158.8 million aggregate principalamount  of Floating Rate Notes due 2011for $26.7 million of cash, $67.8 million aggregate principal amount of FixedRate Notes due 2014 and approximately 33,940,683 shares of newly authorized Class ACommon Stock.  The shares of Class ACommon Stock issued to the holders of the Fixed Rate Notes due 2014 represented62.5% of the aggregate shares of common stock outstanding after consummation ofthe Restructuring.

 

Holders of $6.4 millionaggregate principal amount of Floating Rate Notes due 2011 did not tender theirnotes pursuant to the Restructuring. These Floating Rate Notes due 2011 will remain on our consolidatedbalance sheets until their maturity date in August 2011 unless acquired orretired by us at an earlier date.  Theindenture governing the Floating Rate Notes due 2011 was amended to eliminatesubstantially all of the restrictive covenants and certain events of defaultfrom such indenture.

 

***Fixed Rate Notes due 2014***

 

Pursuant to the Restructuring consummated on September 22,2009, the Company issued $67.8 million aggregate principal amount of Fixed Rate Notes due 2014.  Interest on the Fixed Rate Notesdue 2014 accrues at the rate of 13.25% per annum and is payable semi-annuallyin cash on February 1 and August 1 of each year, commencing on February 1,2010, to the holders of record of the Fixed Rate Notes due 2014 on theimmediately preceding January 15 and July 15.  The Fixed Rate Notes due 2014 will mature on August 1,2014.  The Fixed Rate Notes due 2014 were issued at adiscount, which will be recorded as a reduction from the Fixed Rate Notes due2014 on our consolidated balance sheets during the first quarter of fiscal year2010, and which will be amortized as an increase to interest expense over theremaining life of the Fixed Rate Notes due 2014.

 

The Fixed Rate Notes due 2014 are senior subordinated secured obligations ofthe Company, subordinated in right of payment to obligations of the Companyunder the Commodity Supply Facility.  TheFixed Rate Notes due 2014 are senior in priority to the Company’sunsecured senior obligations, including the Floating Rate Notes due 2011, tothe extent of the value of the assets securing the Fixed Rate Notes due 2014 in excess of the aggregate amount of the outstanding Commodity Supply Facility obligations.

 

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

 

The Fixed Rate Notes due 2014 are secured by afirst priority interest in a cash escrow account maintained as security forfuture payments to holders of the Fixed Rate Notes due 2014 (the “Notes EscrowAccount”) and by a second-priority security interest in substantially all otherexisting and future assets of the Company. The Notes Escrow Account was funded with 

 

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approximately $9.0 million, which representsthe approximate interest payable on the Fixed Rate Notes due 2014 for atwelve-month period.

 

***Denham Credit Facility***

 

The Denham CreditFacility was a $12.0 million line of credit that bore interest at 9% perannum.  The termination date for theDenham Credit Facility was May 19, 2010, at which time any outstandingprincipal balance would have become due.

 

In accordance withthe September 30, 2008 amendment and restatement of our Revolving CreditFacility, we were required to borrow any available balance under the DenhamCredit Facility prior to November 7, 2008, and to maintain such balanceoutstanding until the Revolving Credit Facility expired.  In September 2008, we borrowed theentire $12.0 million balance available under the Denham Credit Facility asrequired by the Amended Revolving Credit Agreement, the entire amount of whichwas still outstanding at June 30, 2009. The outstanding balance outstanding under the Denham Credit Facility wasrepaid; including accrued and unpaid interest, and the Denham Credit Facilitywas terminated on September 22, 2009.

 

***Commodity Supply Facility***

 

As a result of the Restructuring consummated onSeptember 22, 2009, the Revolving Credit Facility, Hedge Facility andvarious arrangements for the supply of natural gas and electricity werereplaced by the Commodity Supply Facility.  Under the CommoditySupply Facility, the primary obligorsare MXenergy Inc. and MXenergy Electric Inc. and all obligations are guaranteedby Holdings and its other domestic subsidiaries.  Obligations under the Commodity SupplyFacility are secured by a first priority lien on substantially all of Holdings’and its domestic subsidiaries’ existing and future assets, other than aninterest reserve account held on behalf of the holders of the Fixed Rate Notesdue 2014.   The maturity date of theCommodity Supply Facility is August 31, 2012, provided that RBS Semprawill have the right to extend such maturity date by one year at its solediscretion, provided that such notice is provided by RBS Sempra no later than April 30,2011.

 

The Commodity Supply Facility provides for theexclusive supply of physical (other than as needed for balancing) and financialnatural gas and electricity, credit support (including letters of credit andguarantees) for certain collateral needs, payment extension financing and/orstorage financing as needed, and associated hedging transactions in order tomaintain the Company’s required matched trading book.  In addition, the Commodity Supply Facility willprovide that we will release natural gas transportation and delivery capacityto RBS Sempra and for RBS Sempra toperform certain transportation and storage nominations. The Commodity SupplyFacility also will provide for RBS Sempra to acton the Company’s behalf to satisfy the requirements of regional transmissionoperators for capacity rights and ancillary services.

 

Under the supply terms ofthe Commodity Supply Facility, the Company has the ability to: (1) seekcommodity price quotes from third parties for certain physically or financiallysettled transactions with respect to gas and electricity; and (2) requestthat RBS Sempra enter into such transactions with such thirdparties at such prices and to concurrently enter into back-to-back off-settingtransactions with the Company with respect to such third partytransactions.  RBS Sempra wouldnot be obligated to enter into a transaction with any third party unless RBS Sempra issatisfied with such transaction and unless the volume of those transactionsdoes not exceed annual limits.  Inaddition to the actual purchase price paid by RBS Sempra andcertain related costs and expenses, the Company will be charged an adder forsuch third-party purchases.

 

The Commodity Supply Facility also provides forcertain volumetric fees for all natural gas and electricity purchases, as wellas minimum purchase requirements for both natural gas and electricity over theinitial three-year term and over the optional one-year extension term.

 

Under the hedging terms of the Commodity SupplyFacility, the aggregate notional exposureamount of fixed price hedges allowed to be entered into by the Company will belimited to $260.0 million, without adjustment for mark-to-market movementsthereafter.  Fixed price hedges will belimited to a contract length term of 24 months. In addition, the fixed price portfolio of hedges will be limited to aweighted-average volumetric tenor not to exceed 14 months in duration.**** With regards to theCompany’s fixed price customer mix, the Company may not, during any 12 monthperiod, enter into any new fixed price contracts with respect to the gasbusiness where the residential customer equivalents of such contracts aregreater than 75% of all residential customer equivalents of all new contractsentered into during such period and/or maintain a customer portfolio with morethan 325,000 residential customer equivalents operating under fixed price contracts.

 

The maximum amount of cash borrowings permittedunder the storage and/or payment extension financing provisions of theCommodity 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.

 

With regards to the aggregate exposureoutstanding under the Commodity Supply Facility, the Company must maintain aratio of eligible current working capital assets to outstanding supply andfinancing exposure (excluding any exposure related to hedging activities)greater than 1.25:1.0 during the months of October through March, andgreater then 1.4:1.0 during the months of April through September; (the“Collateral Coverage Ratio”).  Inaddition, the Company must maintain a consolidated tangible net worth, asdefined in the agreement that governs the Commodity Supply Facility, of atleast $60.0 million.

 

On September 22,2009, certain of the Company’s natural gas hedging transactions under the Hedge Facility were novated or otherwise transferred to RBS Sempra.  In addition, the Commodity Supply Facilityrequires the Company to novate or unwind certain existing electricity andinterest rate swaps subsequent to closing, with RBS Sempraproviding any necessary credit support to liquidate those positions.

 

In connection with the Commodity Supply Facility,RBS Sempra was issued 4,002,290 shares of Holdings’ Class B Common Stock,which was equal to 7.37% of the outstanding common stock as of September 22,2009.

 

The agreements that govern the Commodity SupplyFacility 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 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 other restricted payments;

·                  engage in a different line of business;

·                  amend, modify or terminate certain material agreements in a manner that isadverse to the lenders; and

·                  engage in certain transactions with affiliates.

 

The Commodity Supply Facility also containscustomary events of default, including:

 

·                  payment defaults;

·                  breaches of representations and warranties;

·                  covenant defaults;

·                  cross defaults to certain other indebtedness in excess of specifiedamounts;

·                  certain events of bankruptcy and insolvency;

·                  ERISA defaults;

·                  judgments in excess of specified amounts;

·                  failure of any guaranty or security document supporting the New Facilitiesto be in full force and effect;

·                  the termination or cancellation of any material contract which terminationor cancellation could reasonably be expected to have a material adverse effecton us; or

·                  a change of control.

 

***Agency Credit Ratings***

 

Our credit ratings as of June 30,2009 are summarized in the following table.

 
| ** **                           | ** ** | **Standard********& Poor’s** | ** ** | **Moody’s********Investors********Service** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------|------------|
|                                 |       |                                  |       |                                             |       |
| Corporate rating                     |       | CC                                    |       | Caa3                                             |       |
| Floating Rate  Notes due 2011 rating |       | C                                     |       | Ca                                               |       |
| Ratings outlook                      |       | Negative                              |       | Review                                           |       |

 

In November 2008,Standard & Poor’s lowered our corporate credit rating to CCC+ from Band our Floating Rate Notes due 2011 rating from CCC+ to CCC-.  Also in November 2008, Moody’s loweredour corporate credit rating to Caa3 from B3 and our Floating Rate Notes due2011 rating to Ca from Caa1.  Theseactions were due to the expectation that our liquidity position woulddeteriorate due to a decline in the available borrowing base under our RevolvingCredit Facility.

 

In December 2008,Standard & Poor’s further lowered our corporate rating to CC and ourFloating Rate Notes due 2011 rating to C following our announcement of a tenderoffer to purchase our Floating Rate Notes due 2011.  The tender offer 

 

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also prompted a review byMoody’s, which did not result in any changes in our corporate or Floating RateNotes due 2011 ratings with them.

 

In July 2009, inresponse to our announcement of a bond exchange tender offer in June 2009,Moody’s lowered the rating on our Floating Rate Notes due 2011 to Caa3 from Caand our ratings outlook to negative.  In August 2009,also in response to our announcement of a bond exchange tender offer, Standard &Poor’s lowered our corporate rating to SD (selected default) and our FloatingRate Notes due 2011 rating to D (default) and announced that it is withdrawingits rating of us.  In September 2009,Moody’s assigned a probability of default of Ca/LD (limited default) to us andannounced that it is withdrawing its ratings of us.

 

Since the agreements thatgovern the Fixed Rate Notes due 2014, Floating Rate Notes due 2011 andCommodity Supply Facility do not require us to be rated by credit ratingagencies, we have terminated our arrangements with Moody’s and Standard &Poor’s effective in August 2009.

 

**Summaryof Contractual Obligations**

 

The following tablediscloses aggregate information about our contractual obligations andcommercial commitments as of June 30, 2009:

 
| ** **                                     | ** ** | **Contractual Obligation Amounts Maturing In** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Less Than**                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **1 Year**                                                    | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                                            | ** ** |
|                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Floating  Rate Notes due 2011 (1)              |       | $                                                                  | 26,700     |   | $ | 6,413 |   | $ | — |   | $ | — |   | $ | 33,113 |   |
| Denham  Credit Facility (2)                    |       | 12,000                                                             |       | — |   | — |   | — |   | 12,000 |   |
| Bridge  Financing loans (2)                    |       | 5,400                                                              |       | — |   | — |   | — |   | 5,400 |   |
| Hedge  Facility (3)                            |       | 217                                                                |       | — |   | — |   | — |   | 217 |   |
| Operating  leases (4)                          |       | 760                                                                |       | 440 |   | 468 |   | 844 |   | 2,512 |   |
| Capacity  charge commitments (5)               |       | 6,547                                                              |       | 100 |   | — |   | — |   | 6,647 |   |
| Natural  gas physical purchase commitments (6) |       | 14,838                                                             |       | 90 |   | — |   | — |   | 14,928 |   |
| Electricity  physical purchase commitments (6) |       | 10,402                                                             |       | 4,103 |   | — |   | — |   | 14,505 |   |
| Total                                          |       | $                                                                  | 76,864     |   | $ | 11,146 |   | $ | 468 |   | $ | 844 |   | $ | 89,322 |   |

 

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| (1) | $158.8 million aggregate  principal amount of Floating Rate Notes due 2011 were exchanged for cash,  common stock and the Fixed Rate Notes due 2014 under the Restructuring  consummated on September 22, 2009. The cash paid in the exchange is  reflected as maturing in less than 1 year. $6.4 million aggregate principal  amount of Floating Rate Notes due 2011 not exchanged are reflected as  maturing in 1-3 years.                                                               |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The Denham Credit  Facility was and Bridge Financing loans were repaid and terminated pursuant  to the Restructuring consummated on September 22, 2009.                                                                                                                                                                                                                                                                                                                                    |
| (3) | Includes monthly  facility management and other fees.                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (4) | Includes amounts  anticipated to be paid for leased office space under non-cancelable operating  leases, which contain escalation clauses, have terms that expire between  July 2009 and October 2017 and are subject to extension at the  option of the Company. We take into account all escalation clauses when  determining the amount of future minimum lease payments. All future minimum  lease payments are recognized on a straight-line basis over the minimum lease  term. |
| (5) | Includes anticipated  fees associated with agreements to transport and store natural gas. These  agreements are take-or-pay in that we must pay for the capacity committed  even if we do not use the capacity.                                                                                                                                                                                                                                                                                 |
| (6) | Includes both fixed and  variable portions of physical forward contracts. The variable portion is  indexed as the NYMEX settle price for the corresponding delivery month in  which the natural gas is purchased. The estimated contractual obligations are  based on the NYMEX forward curve as of June 30, 2009 for all  corresponding delivery months.                                                                                                                                  |

 

In addition, as of June 30,2009, we were required to provide collateral in the form of cash or letters ofcredit related to activity under our Hedge Facility, commodity supplieragreements and various transportation and storage arrangements.  At June 30, 2009, we posted a $35.0million letter of credit as collateral under our Hedge Facility, $34.3 millionof letters of credit as collateral under various supplier agreements and $27.0million of letters of credit under various transportation and storageagreements.  As of June 30, 2009,all outstanding letters of credit were scheduled to mature during fiscal 2010.

 

Effective September 22,2009, under the Commodity Supply Facility, the Company is obligated to purchasea minimum of 130,000,000 MMBtus of natural gas from RBS Sempra, for physicaldelivery in accordance with the following schedule:  (1) 39,000,000 MMBtus during the firstcontract year; (2) 44,000,000 MMBtus during the second contract year; and (3) 47,000,000MMBtus during the third contract year. The estimated total value of these purchases will depend upon the marketprice of natural gas at the time of these purchases.  The Company’s price of natural gas ranged froma high of approximately $12.75 per MMBtu in July 2008 to a low of approximately$3.25 per MMBtu in May 2009.  In theevent of early termination of the Commodity Supply Facility, the Company will be obligated to pay a volumetric feefor any unused balance of the minimum volume purchase requirement.

 

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**Off-BalanceSheet Arrangements**

 

We did not have anyoff-balance sheet arrangements as of June 30, 2009 or 2008.

 

**CriticalAccounting Policies**

 

The preceding discussionand analysis of our financial condition and results of operating results arebased on our consolidated financial statements, which have been prepared inconformity with U.S. GAAP.  Thesignificant accounting policies used in the preparation of our consolidatedfinancial statements are more fully described in Note 2 of the consolidatedfinancial statements included elsewhere in this Annual Report.

 

Many of our significantaccounting policies require complex judgments to estimate values of assets andliabilities.  In making these judgments,management must make certain estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues and expenses.  Because changes in such estimates andassumptions could significantly affect our reported financial position andresults of operations, detailed policies and control procedures have beenestablished to ensure that valuation methods, including judgments made as partof such methods, are well controlled, independently reviewed, and are appliedconsistently from period to period.

 

On an on-going basis, weevaluate our estimates, which are based on historical experience, weather data,terms of existing customer contracts, and various other assumptions that webelieve to be reasonable under the circumstances.  Our actual results may differ from theseestimates and assumptions.

 

Of the significantpolicies used to prepare our consolidated financial statements, the itemsdiscussed below require critical accounting estimates involving a high degreeof judgment and complexity.  For all ofthese critical policies, we caution that future events rarely develop exactlyas forecasted, and the best estimates routinely require adjustment. Thisinformation should be read in conjunction with our consolidated financialstatements included elsewhere in this Annual Report.

 

***Revenue Recognition***

 

We recognize revenue fromthe sale of natural gas and electricity in the period in which the commodity isconsumed by customers.  Our customers arebilled monthly on various dates throughout the month.  We accrue for revenues applicable to naturalgas and electricity consumed by customers, but not yet billed, under the cyclebilling method.  These unbilled revenuesare determined by considering the following factors: (1) estimates of thevolume consumed by customers during a calendar month; (2) the averagesales price per unit for each respective market area or customer class; (3) thevolumes delivered to the LDC during the calendar month; and (4) the timingof billings completed under the cycle billing method.  These estimates are adjusted to actualbillings in subsequent periods when the meters are read and any change in previousestimates is reflected in operations during the period that the change isdetermined.  Revenue recognition isconsidered to be a critical accounting policy due to the following factors:

 

·                  Volume estimates are dependent uponprojected weather conditions, which in turn are based upon historicaltemperature trends.  Actual weatherconditions may differ from historical averages; and

·                  Due to the seasonality of our business,such estimates may vary significantly from quarter to quarter.

 

***Allowance for Doubtful Accounts***

 

We assume the credit riskassociated with non-payment by our customers in markets where LDCs do notguarantee customer accounts receivable. In those markets, we record an allowance for doubtful accounts based onthe age of accounts receivable, customer payment history, past loss experienceand current market conditions.  Werecognize that there is a high degree of subjectivity and imprecision inherentin the 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:

 

·                  Economic trends and conditions in the markets weserve, which may deteriorate and impact the ability of our customers to paybalances owed to us; and

·                  Higher concentrations of our business in certainnon-guaranteed markets, such as Georgia and Texas, which could expose us tohigher losses if economic conditions in those specific markets were todeteriorate.

 

We are also subject tocredit risk associated with the creditworthiness of LDCs that guaranteecustomer accounts receivable balances. Although all of the LDCs that guarantee our customer accounts receivablehad investment grade credit ratings as of June 30, 2009, any detrimentalchange in the creditworthiness of these LDCs could affect their ability to payus amounts when due, and may result in the need for higher allowances andprovisions for doubtful accounts.

 

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In addition, we may bearcredit risk related to imbalance settlement receivables from LDCs and ISOs, tothe extent that such LDCs and ISOs are unable to collect imbalance settlementspayable to them by other retail marketers.  We record an allowance for doubtful accounts during the month that fullcollection of any such imbalance receivable balance becomes doubtful.  Therefore, the creditworthiness of otherretail marketers, which is difficult to predict and monitor, may also impactour allowance and provision for doubtful accounts.

 

***Goodwill***

 

Goodwill is notamortized, but is reviewed for impairment at least annually or more frequentlyif events or changes in circumstances indicate that the carrying amount may notbe recoverable.  Goodwill is tested forimpairment annually at June 30.  Weutilize a discounted cash flow methodology for our impairment testing, whichgives consideration to significant and long-term changes in industry and economicconditions as primary indicators of potential impairment.

 

Goodwill of $3.8 millionon our consolidated balance sheet at June 30, 2009 represents the excessof purchase price over the fair value of identifiable net assets acquired fromSESCo in August 2006.   The goodwillrelated to the SESCo Acquisition was recorded at June 30, 2007, which isthe date that the purchase allocation was finalized.  The goodwill has been assigned entirely tothe natural gas business segment since the customers acquired in the SESCoAcquisition were primarily natural gas accounts.

 

Impairment testing ofgoodwill is considered to be a critical accounting estimate due to thesignificant judgment required in the use of discounted cash flow models todetermine fair value.  Assumptions usedinvolve a high degree of subjectivity that is based on historical experienceand internal forecasts of future results. Actual results in future periods may not necessarily approximatehistorical experience or forecasts.

 

For the purpose oftesting for goodwill impairment, we have elected to use a valuation techniquethat is based on a multiple of earnings. The fair value of our natural gas net assets are calculated using asimilar earnings forecasting model as that used for our annual forecast and forour common stock valuation model. Critical assumptions used for the fair value model, include:

 

·                  growth in natural gas RCEs, net ofattrition, and related growth in the volume of natural gas MMBtus sold;

·                  expected natural gas gross profit perMMBtu sold;

·                  expense trends;

·                  multiples of past and future earnings;and

·                  the discount rate to calculate thepresent value of future earnings.

 

We completed our annualgoodwill impairment test as of June 30, 2009, and have concluded thatthere was no impairment of goodwill as of that date. In addition, we haveconcluded that, due to the successful consummation of the Restructuring, we arenot at-risk for impairment.

 

***Customer Acquisition Costs, net***

 

Customer acquisitioncosts are comprised of: (1) customer contracts acquired through bulkacquisitions and business combinations; and (2) direct sales and advertisingcosts, which consist primarily of direct-response hourly telemarketing,non-hourly telemarketing and door-to-door marketing costs incurred throughindependent third parties, and which are associated with proven customergeneration.

 

Customer acquisitioncosts are capitalized and generally 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.  Examples of such events orchanges in circumstances include:

 

·                  a significant decrease in the market value of anacquired asset;

·                  a significant adverse change in the legal factors orin the business climate that could affect the value of the asset, including anadverse action or assessment by a regulator;

·                  an accumulation of costs significantly in excess ofthe amount originally expected to acquire the asset;

·                  a current period operating or cash flow loss combinedwith a history of operating or cash flow losses or a projection of continuedloss;

 

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·                  a current expectation that, more likely than not, theasset will be sold or otherwise disposed of significantly before the end of itspreviously estimated useful life.

 

Our model used to assessthe estimated recoverability of customer acquisition costs includes estimatesof the future cash flows expected to result from the use of the customer assetsand their eventual disposition.  Theestimated fair value resulting from this model is compared with the carryingamount of the asset.  If impairment wereto be identified, it could result in additional expense recorded in ourconsolidated statement of operations. Estimation of future cash flows includes consideration of specificassumptions for customer attrition, per unit gross profit, and operatingcosts.  The estimate of future cash flowsis considered to be a critical estimate because the assumptions used involve ahigh degree of subjectivity and are based on historical experience and internalforecasts of future results.  Actualresults in future periods may not necessarily approximate historical experienceor forecasts.

 

The average three-yearlife of a customer is also considered to be a critical assumption because it isan estimate of the expected period over which an average customer will provideus with cash flows.  If competitivemarket conditions were to deteriorate for us, customer attrition couldincrease, which could result in a lower average life of a customer.

 

As a result of allquarterly reviews conducted for the fiscal year ended June 30, 2009, wehave concluded that there was no impairment to the carrying value of customeracquisition costs recorded on our consolidated balance sheets.

 

***Income Taxes***

 

The calculations ofincome tax expense and related balance sheet amounts involve a high degree ofmanagement judgment regarding estimates of the timing and probability ofrecognition of revenue and deductions by taxing authorities.  Deferred income taxes reflect the net taxeffects of temporary differences between the carrying amount of assets and liabilitiesfor financial reporting purposes and the amounts used for income tax purposesusing enacted tax rates expected to be in effect for the year in which thetemporary differences are expected to reverse. In management’s opinion, adequate reserves have been recorded for anyfuture taxes that may be owed as a result of examination by any taxingauthority.

 

Total current andlong-term deferred income tax assets were $24.1 million and $10.5 million at June 30,2009 and 2008, respectively.  Our policyis to establish a valuation allowance if it is “more likely than not” that therelated tax benefits will not be realized. At June 30, 2009, we determined that it was “more likely than not”that a portion of our deferred tax assets would not be realized.

 

We have deferred taxassets related to unrealized losses from risk management activities.  We anticipate that these deferred tax assetswill be realized in future periods when sales of fixed price commodities, towhich the unrealized losses from risk management activities relate, occur.  Therefore, we did not establish a valuationallowance for these deferred tax assets.

 

For the remainingdeferred tax assets reflected in the table above, 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, we recorded valuation allowances of approximately $22.0million and $0.7 million related to our U.S. and Canadian operations,respectively, as a reduction of the tax benefit recorded for fiscal year 2009.

 

The valuation allowancerelated to deferred tax assets is considered to be a critical estimate because,in assessing the likelihood of realization of deferred tax assets, managementconsiders taxable income trends and forecasts. Actual income taxes expensed and/or paid could vary from estimatedamounts due to the impacts of various items, including:

 

·                  changes to tax laws by taxing authorities;

·                  final review of filed tax returns by taxingauthorities;

·                  actual financial results for recent fiscal years; and

·                  actual financial condition and results of operationsof future periods that could differ from forecasted amounts.

 

***Derivatives***

 

We utilize both physicaland derivative financial instruments to reduce our exposure to fluctuations inthe price of natural gas and electricity. Settlements on derivative financial instruments are realized on amonthly basis, generally based upon the difference between the contract priceand the settlement price as quoted on NYMEX or other published indices.  All derivative financial instruments arecarried on the balance sheet at fair value. Any changes in fair value are adjusted through unrealized losses (gains)from risk management activities in the consolidated statements of operations.This accounting results in significant volatility in earnings due to the impactmarket prices have on the market positions and financial instruments that wehave entered into.  In determining thefair value of derivative financial instruments, we use quoted 

 

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market prices wheneverpossible.  As of June 30, 2009, lessthan 2% of the notional values of all derivative financial instrumentsoutstanding were valued using non-quoted prices.

 

If quoted market pricesare not available, quotes from third party brokers or internally-developedpricing models that are based on various assumptions and management judgmentare used.  Although the total notionalvalue of these instruments is not material at June 30, 2009, theassumptions used for these pricing models are considered to be criticalestimates due to the high level of management judgment utilized in theirdevelopment.

 

We have implemented riskmanagement controls and limits to monitor our risk position related toderivatives and to ensure that hedging performance is in line with agreed-uponobjectives (refer to “Item 7A. Quantitative and Qualitative Disclosures AboutMarket Risk”).

 

***Redeemable Convertible Preferred Stock***

 

Prior to the consummationof the Restructuring, we were authorized to issue 5,000,000 shares of PreferredStock.  On June 30, 2004, we enteredinto the Preferred Stock Purchase Agreement, pursuant to which we issued1,451,310 shares of Preferred Stock at a purchase price of $21.36 pershare.  In accordance with provisions ofthe Preferred Stock Purchase Agreement, the Preferred Investors had the rightto: (1) receive dividends on their shares; (2) convert their sharesto common stock; and (3) elect to require us to redeem the PreferredStock.  The rights of Preferred Investorsto receive dividends and to elect to require redemption of the Preferred Stockwere dependent upon the fair value of our common stock during the five-yearperiod ending June 30, 2009.  Undercertain circumstances, the appropriate redemption, conversion and dividendamounts were dependent upon the fair value of our common stock.

 

Because our common stockis not publicly traded, we obtain an independent valuation of fair value at June 30of each fiscal year.  For the three-monthperiods ended September 30, December 31, and March 31 of eachfiscal year, we calculate the fair value our common stock using aninternally-developed model that approximates the independent model.  Key estimates and assumptions used in ourstock valuation models include: (1) internally-developed earningsforecasts that reflect estimates of revenue and expense growth; and (2) expectedstock price volatilities that are estimated based on historical realizedvolatilities of comparable publicly traded company stock prices.  These are considered to be critical estimatesbecause the assumptions used involve a high degree of subjectivity and arebased on historical experience and internal forecasts of future results.  There can be no assurance that actual futureearnings or stock volatilities will approximate these estimates.

 

The Preferred Stock wasconverted to common stock on September 22, 2009 pursuant to theRestructuring.

 

***Stock-Based Compensation***

 

As of June 30, 2009,we had three stock-based compensation plans in effect, under which warrants andoptions have been granted to employees, non-employees and directors.  We use the Black-Scholes-Mertonoption-pricing model for estimating the fair value of awards granted after June 30,2006.  The Black-Scholes-Mertonoption-pricing model was developed for use in estimating the fair value oftraded options which have no vesting restrictions and are fullytransferable.  In addition,option-pricing models require the input of highly subjective assumptions,including expected stock price volatility, expected term of the option award,expected annual forfeiture rate and risk-free interest rate.  These assumptions are primarily based onhistorical experience that may not necessarily approximate future results.

 

For awards of warrantsand options granted prior to July 1, 2006, expense recorded in ourstatements of operations may fluctuate from reporting period to reportingperiod based upon the calculated fair value of our common stock.  Because our common stock is not publiclytraded, we obtain an independent valuation of fair value at June 30 ofeach fiscal year.  For the three-monthperiods ended September 30, December 31, and March 31 of eachfiscal year, we calculate the fair value our common stock using aninternally-developed model that approximates the independent model.  Key estimates and assumptions used in ourstock valuation models include: (1) internally-developed earningsforecasts that reflect estimates of revenue and expense growth; and (2) expectedstock price volatilities that are estimated based on historical realizedvolatilities of comparable publicly traded company stock prices.  These are considered to be critical estimatesbecause there is no guarantee that actual future earnings or stock volatilitieswill approximate these estimates.

 

Because our stock optionsand warrants have characteristics significantly different from those of tradedoptions, and because changes in the subjective assumptions used in thevaluation models can materially affect fair value estimates, the existingmodels do not necessarily provide a reliable single measure of the fair valueof our stock options.

 

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As of June 30, 2009,we had options and warrants outstanding that were, or may be, exercisable for1,008,770 shares of common stock. Pursuant to the Restructuring, we offered a cash settlement to holdersof options and warrants to cancel and terminate such options and warrants.  As a result, all outstanding options andwarrants were cancelled and terminated.

 

**NewAccounting Pronouncements**

 

***Accounting Pronouncements Adopted Duringthe Fiscal Year Ended June 30, 2009***

 

In September 2006,the Financial Accounting Standard Board (“FASB”) issued Statement of FinancialAccounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”).  SFAS No. 157 defines fair value,establishes a framework for measuring fair value, and requires additionaldisclosures regarding fair value measurements. In addition, SFAS No. 157 requires that entities consider their owncredit risk when measuring the fair value of liabilities including, but notlimited to, liabilities related to derivative contracts.  We adopted the provisions of SFAS No. 157,effective July 1, 2008.  Theadoption of SFAS No. 157 did not have a material impact on our financialposition or results of operations.

 

In February 2008,the FASB issued Statement of Financial Accounting Standards No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”),which permits, but does not require, entities to elect fair value measurementfor both the initial and subsequent measurements of certain financial assetsand liabilities that were not previously measured at fair value, generally onan instrument-by-instrument basis. Changes in fair value subsequent to initial measurement are to berecognized in earnings during the periods when those changes occur.  SFAS No. 159 also requires additionaldisclosures to compensate for the lack of comparability that will arise fromthe election of the fair value option for those financial instruments.  We did not adopt the provisions of SFAS No. 159for any financial assets or liabilities as of the effective date of July 1,2008.

 

In September 2008,the FASB ratified the consensus on Emerging Issues Task Force Issue No. 08-5,“Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-PartyCredit Enhancement” (“EITF No. 08-5”). EITF No. 08-5 requires that the measurement of liabilities withinseparable, third-party credit enhancements carried or disclosed at fair valueon a recurring basis exclude the effect of the credit enhancement.  EITF No. 08-5 also requires debtors toconsider their own credit standing, and not that of the third-party guarantor,in measuring the fair value of a liability with a third-party guarantee.  EITF No. 08-5 is effective on aprospective basis for the first reporting period on or after December 15,2008, with earlier application permitted. We adopted the provisions of EITF No. 08-5 effective January 1,2009.  Adoption of EITF No. 08-5 didnot have any impact on our financial position or results of operations.

 

In March 2008, theFASB issued Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities” (“SFAS No. 161”).  SFAS No. 161 requires companies withderivative instruments to disclose information that would enable readers offinancial statements to understand: (1) how and why a company usesderivative instruments; (2) how derivative instruments and related hedgeditems are accounted for under U.S. GAAP; and (3) how derivativeinstruments and related hedged items affect a company’s financial position,financial performance and cash flows. SFAS No. 161 must be applied prospectively for fiscal years andinterim periods beginning after November 15, 2008.  We adopted the provisions of SFAS No. 161effective January 1, 2009.

 

In April 2009, theFASB issued FASB Staff Position No. FAS 157-4, “Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly” (“FSPNo. 157-4”).  FSP No. 157-4provides additional guidance for estimating fair value in accordance with SFAS No. 157when the volume and level of activity for the asset or liability havesignificantly decreased.  It alsoprovides guidance on identifying circumstances that indicate a transaction isnot orderly.  FSP No. 157-4 iseffective for interim and annual reporting periods ending after June 15,2009.  We adopted the provisions of FSP No. 157-4effective for our fiscal quarter ending June 30, 2009.  The adoption of FSP No. 157-4 did nothave any impact on our financial condition or results of operations

 

In May 2008, the FASBissued Statement of Financial Accounting Standards No. 162, “The Hierarchyof Generally Accepted Accounting Principles” (“SFAS No. 162”).  SFAS No. 162 identifies the sources ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements that are presented in conformity withU.S. GAAP.  We adopted the provisions ofSFAS No. 162 effective January 1, 2009.  The adoption of SFAS No. 162 did nothave any impact on our financial position or results of operations.

 

In May 2009, FASBissued Statement of Financial Accounting Standards No. 165, “SubsequentEvents” (“SFAS No. 165”).  SFAS No. 165establishes principles and requirements for subsequent events, including: (1) theperiod after the balance sheet date during which management of a reportingentity shall evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements; (2) thecircumstances under which an entity shall recognize events or 

 

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transactions occurringafter the balance sheet date in its financial statements; and (3) thedisclosures that an entity shall make about events or transactions thatoccurred after the balance sheet date. SFAS No. 165 is effective for interim or annual financial periodsending after June 15, 2009.  Weadopted the provisions of SFAS No 165 effective with our financial statementsprepared for the fiscal year ended June 30, 2009.  The adoption of SFAS No. 165 did nothave any impact on our financial position or results of operations.

 

***Accounting Pronouncements Not Yet Adopted as of June 30, 2009***

 

In March 2008, theFASB issued Statement of Financial Accounting Standards No. 141(R), “BusinessCombinations” (“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and requirements for anacquiring company to recognize and measure in its financial statements theidentifiable assets acquired, liabilities assumed, goodwill acquired, any gainfrom a bargain purchase, and any noncontrolling interest in an acquiredcompany.  In addition, SFAS No. 141(R) providesguidance for disclosures relating to business combinations.  SFAS No. 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  We intend to adopt the provisionsof SFAS No. 141(R) for acquisitions occurring on or after July 1,2009.  We are currently evaluating theprovisions of SFAS No. 141(R) to determine their likely impact on theaccounting and reporting for future acquisitions, if any.

 

Also in March 2008,the FASB issued Statement of Financial Accounting Standards No. 160, “NoncontrollingInterests in Consolidated Financial Statements — An Amendment of ARB No. 51”(“SFAS No. 160”).  SFAS No. 160establishes accounting and reporting standards for ownership interests insubsidiaries held by parties other than the parent, for changes in a parent’sownership interest while the parent retains its controlling financial interestin a subsidiary, and for any retained noncontrolling equity investment by aparent when a subsidiary is deconsolidated. SFAS No. 160 is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2008.  We intend to adopt the provisions of SFAS No. 160for acquisitions occurring on or after July 1, 2009.  We are currently evaluating the provisions ofSFAS No. 160 to determine their likely impact on the accounting andreporting for future acquisitions, if any.

 

In April 2009, theFASB issued FASB Staff Position No. FAS 141(R)-1, “Accounting for AssetsAcquired and Liabilities Assumed in a Business Combination That Arise fromContingencies” (“FSP No. FAS 141(R)-1”). FSP No. FAS 141(R)-1 amends and clarifies SFAS No. 141(R) toaddress application issues relating to accounting and disclosures for assetsand liabilities arising from contingencies in a business combination.  FSP No. FAS 141(R)-1 appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  We intend to adopt the provisionsof FSP No. FAS 141(R)-1 for acquisitions occurring on or after July 1,2009.  We are currently evaluating theprovisions of FSP No. FAS 141(R)-1 for their likely impact on theaccounting and reporting for future acquisitions, if any.

 

In April 2009, theFASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “InterimDisclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB28-1”).  FSP FAS 107-1 and APB 28-1amends FASB Statement No. 107, “Disclosures about Fair Value of FinancialInstruments,” to require disclosures about financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements.  It also amends APB Opinion No. 28,“Interim Financial Reporting,” to require those disclosures in summarizedfinancial information at interim reporting periods.  FSP FAS 107-1 and APB 28-1 is effective forinterim reporting periods ending after June 15, 2009, with early adoptionpermitted for periods ending after March 15, 2009.  We intend to adopt the provisions of FSP FAS107-1 and APB 28-1 effective with our reporting period ending September 30,2009, which represents the first interim reporting period of our 2010 fiscalyear.

 

In June 2009, theFASB issued Statement of Financial Accounting Standards No. 168, “The FASBAccounting Standards CodificationTM and the Hierarchy of Generally AcceptedAccounting Principles” (“SFAS No. 168”). SFAS No. 168 identifies the sources of accounting principles andthe framework for selecting the principles used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principles in the United States.  SFAS No 168 replaces SFAS No. 162.   SFAS No. 168 is effective for financialstatements issued for interim and annual periods ending after September 15,2009.  We intend to adopt the provisionsof SFAS No. 168 effective July 1, 2009.  The adoption of SFAS No. 168 is notexpected to have any impact on our financial position or results of operations.

 

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**RiskManagement**

 

***Overview***

 

Some degree of risk isinherent in virtually all of our activities. As a result of our business growth into new markets and increasedcomplexity of our operating infrastructure, we continuously review and, wherenecessary, upgrade our risk management policies and systems.  The objectives of our risk managementpolicies 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 ofadequate protections against identified risks;

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

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

 

Risk management oversightbegins with our Board of Directors and its various committees, principally theAudit Committee and the Risk Oversight Committee.  The Audit Committee consists of three membersof the Board of Directors and is chaired by an independent director.  The Audit Committee meets regularly and hasoverseen the strengthening of our internal audit function over the past twofiscal years.  The Audit Committee alsomeets with our outside auditors shortly after the end of each quarterly andyear-end reporting period and reviews and approves all financial reports filedwith the SEC.

 

The Risk OversightCommittee is primarily responsible for oversight of our process for identifyingand mitigating market risks associated with acquiring natural gas andelectricity commodities for distribution to our customers.

 

***Market Risk Management***

 

Market risks relating toour operations 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.

 

The Risk OversightCommittee is chaired by an independent director, and includes one additionaldirector as well as our Chief Executive Officer (“CEO”), Chief FinancialOfficer (“CFO”), Chief Operating Officer (“COO”) and Executive Vice President (“EVP”).  The Risk Oversight Committee meets regularlyto ensure that we have adhered to established risk management policies and thatwe continue to be price and volume neutral through proper commodityhedging.  Risk management policies arereviewed at least annually to ensure that material risks associated with newproducts, asset acquisitions, current market and other changes in our riskprofile are adequately addressed.  TheRisk Oversight Committee meets at least twice annually, and as often asnecessary, to address the Company’s risk management activities andpositions.  We have an independent riskmanagement department that is responsible for monitoring and enforcing riskmanagement policies related to commodities hedging activities.

 

Refer to “Item 7.Quantitative and Qualitative Disclosures about Market Risks” for additionalcommentary regarding market risks.

 

***Liquidity Risk Management***

 

Liquidity risk is therisk that we would be unable to meet our obligations as they become due orunable to fund business growth because of an inability to liquidate assets orobtain adequate funding.  Under theoversight of the Audit Committee, liquidity is managed by the CFO to providethe ability to generate cash to fund current operating, investing and financingactivities and to manage the cost of purchases of natural gas and electricityat a reasonable cost in a reasonable amount of time, while maintaining routineoperations and market confidence.  Thefollowing strategies and processes are utilized to manage liquidity:

 

·*                 ****Utilize our hedgingstrategy to reduce the impact of volatile commodity prices —*** 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, we hedge all anticipated natural gas and electricity commoditypurchases required to meet expected customer demand for all accounts servedunder fixed price contracts.  Although weengage in hedging activities with various counterparties for electricity, as ofJune 30, 2009 we utilized the Hedge Facility as our primary natural gashedge facility.

 

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·      ***Utilize our creditfacilities to provide liquidity for operating requirements*****–** As of June 30, 2009, through the RevolvingCredit Facility, we had a ready source of liquidity, primarily in the form ofletters of credit used for collateral to be placed with hedge counterparties,commodity suppliers and providers of transportation and storage services.  On September 22, 2009, we entered intothe Commodity Supply Facility, which we believe is adequate to supplement cashprovided by operations for meeting our operational liquidity needs for fiscalyear 2010.

 

·*     ****Maximize pricingopportunities within the markets that we serve*****–** Our ability to develop products and prices that arecompetitive within the markets we serve, and to tailor our marketing activitiesto the optimal mix for various markets, while maintaining a reasonable grossprofit per MMBtu or MWhr sold, is crucial to our overall financial success aswell as our liquidity position.

 

·      ***Maximize cash collectionsfrom customers and LDCs –*** During fiscal year 2009, approximately 45% of ourtotal sales of natural gas and electricity was within markets that guaranteecustomer accounts receivable.  The LDCsin these markets have credit ratings that are investment grade.  We monitor the payment histories, creditratings and other financial information for these LDCs in order to identify andaddress adverse trends, if any.  As of June 30,2009, we do not maintain an allowance for doubtful accounts against receivablesfrom these LDCs as we do not anticipate any material credit losses related tothese 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.

 

***Operational and Compliance RiskManagement***

 

Operational risk is therisk 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.

 

Compliance risk is therisk arising from failure to comply with relevant laws, regulations andregulatory 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.

 

Under the generaloversight of our Board of Directors, CEO, COO, CFO and EVP, operational andcompliance risks are directly managed within the following functional areas ofthe organization:

 

·      Regulatoryaffairs;

·      Marketingand sales;

·      Contractpricing;

·      Naturalgas and electricity supply;

·      Customeroperations (including billing activities, quality assurance activities relatedto various marketing programs and management of customer communications);

·      Compliance;

·      Financialand tax reporting;

·      Legalcounsel; and

·      HumanResources and payroll.

 

Management within each ofthese areas is directly responsible for identification of risks, development offormal policies and procedures to manage such risks, and reporting anyincidents, events or transactions, if any, where risks may not be adequatelymitigated.  Under the direction of theAudit Committee and the CFO, the Director of Internal Audit is responsible forinvestigating and addressing any such incidents, events or transactions fortheir impact on our overall risk management environment, on our internalcontrol framework, and on the planning of internal audits.

 

***Fraud Risk***

 

We have a formal fraudrisk assessment program, which is designed to facilitate:

 

·      Identificationof potential fraud risks;

·      Designof internal controls to address and mitigate the fraud risks identified;

·      Periodicreviews of controls for effectiveness; and

·      Monitoringof corporate activities and formal reporting of potential incidents, ifnecessary, to senior management and the Board of Directors.

 

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Under the generaloversight of the Audit Committee and the CFO, our Director of Internal Audit isresponsible for administering the fraud risk assessment program and reportingthe results to the Audit Committee.

 

***Information Systems***

 

We maintain a number ofinformation systems for capturing customer, accounting, supply forecasting andrisk management information.  Themajority of our systems are hosted at an offsite data center in Houston, Texas,which maintains 24/7 security and has stand-alone power generation to keep thedata center functional in the case of an extended power outage.

 

During fiscal year 2008,in conjunction with our hosting provider, we launched an initiative tomodernize our key server infrastructure to increase reliability and to increaseredundancy.  During fiscal 2009, wecontinued to consolidate our multiple existing customer relationship managementtools and multiple billing platforms.  Asof June 30, 2009, more than 80% of our customers had been consolidatedinto our primary strategic systems.** **We are also continuing to convertour demand forecasting and risk management operations to new or enhanced thirdparty software systems.  We are currentlyutilizing these systems and will continue to make enhancements during fiscal2010.

 

We perform daily backupof our key servers and maintain backup tapes for a period of four weeks beforethey are overwritten.  We also perform amonth-end backup of key servers and keep such data for a period of six monthsto one year. All backup tapes are rotated offsite at a secure storage facilityon a weekly basis.  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.

 

We have taken amulti-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.

 

Our corporate website hasbeen custom-developed by an outsourced marketing company and was hosted offsiteas of June 30, 2009.  In July 2009,we began hosting our corporate website onsite with a full-time employee of theCompany serving as our webmaster.

 

***Business ContinuityPlanning***

 

We are committed to theprotection of our employees, customers, shareholders, physical buildings,information systems and corporate records. Our disaster recovery plan and the geographic distance between ouroffices mitigate the risk of catastrophic interruption of our business.

 

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**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

**CommodityPrice Risk**

 

Commodity price risk isthe risk of exposure to fluctuations in the price of natural gas andelectricity.  Because our contractsrequire that we deliver full commodity requirements to many of our customersand because 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.

 

We utilize the followinginstruments to offset price risk associated with volume commitments under fixedand variable price contracts where the price to the customer must beestablished ahead of the index settlement: (1) for natural gas: NYMEX-referenced gas swaps, basis swaps,physical commodity hedges and physical basis hedges; and (2) forelectricity: ISO zone specific swaps, basis swaps, physical hedges and physicalbasis hedges.

 

Economic hedges are alsoutilized to cover inventory injection and withdrawal as well as to coverutility over/under delivery obligations. For fixed price customers, both inventory and imbalances caused byutility over/under delivery obligations are hedged using derivatives orphysical hedges.  For variable pricecustomers, inventory is generally hedged using derivative instruments orphysical commodity hedges and utility imbalances are hedged either through theutilization of derivatives, physical hedges, or through a monthly priceadjustment as published and billed to the customer each month.  The fair values of these hedges, which arerecorded in unrealized gains (losses) from risk management activities on theconsolidated balance sheet, will settle during each specific month to mirrorour planned injections and withdrawals, as well as over/under delivery obligations.

 

The natural gas swapinstruments are generally settled against the closing price for the lasttrading day of each month for natural gas listed on the NYMEX Henry Hub futurescontract.  In the case of electricityswap instruments, settlement is based on ISO settlement prices during themonth.  The financial basis swaps are typically settled against the firstof the month published index prices at various trading points that relate tolocations where we have customer obligations.  Basis swaps are pricedbased on the NYMEX price on the last day of the month plus or minus anagreed-upon premium or discount.  All of the natural gas swaps have been executed “over-the-counter” on abilateral basis under the Hedge Facility or with other credit-worthy counterparties. We also enter into financial swaps with other counterparties in order to meetelectricity requirements. These are settled based on the index price for theappropriate ISO.  We only execute financial swaps with entities withinvestment grade credit ratings.  As of June 30, 2009, our hedge positions extend through December 2011.

 

We have adopted a riskmanagement policy to measure and limit market risk and credit risk associatedwith our customer portfolio.  The riskpolicy requires that we maintain a balanced position at all times and does notpermit speculative trading.  None of ouremployees are compensated on the basis of his or her trading gains.  In marketing products to residential andsmall commercial customers, we hedge in advance of anticipated contract sales(adjusted to reflect attrition).  Whenmarketing to larger commercial accounts, the hedge is executed at the time ofthe contract sale.  Our current risk policyrequires that the following exposures be promptly mitigated: (1) fornatural gas, any exposure in excess of $1.0 million related to the volumetricdifference between commitments to deliver natural gas to customers and therelated hedge positions must be brought back in compliance within threebusiness days; and (2) for electricity, any exposure greater than $750,000related to the volumetric difference between commitments to deliver electricityto customers and related hedge positions must be brought back in compliancewithin three business days.

 

In order to address thepotential volume variability of future deliveries, we utilize various hedgingstrategies to mitigate our exposure.  Fornatural gas, hedging tools may include:  (i) over-hedgingwinter volume obligations in certain markets by up to 10% in order to provideprice and 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 provide for additional daily volumes if demandincreases; and (iv) purchasing put options to protect against fallingprices if unused volume needs to be sold and to protect against customer attritionin excess of that historically experienced. For electricity, hedging tools include: (i) over-hedging summeron-peak volume obligations by up to 10% or purchasing call options in order toprovide price and volume protection from unexpected increases in demand; (ii) enteringinto load shape hedges to cover the inherent imbalance from a normalconsumption curve that a block hedge creates; (iii) purchasing put optionsto protect against falling

 

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prices if unused volumeneeds to be sold and to protect against customer attrition in excess of thathistorically experienced; and (iv) purchase of call options to protectagainst increased customer demand during higher priced “super-peak” hours.

 

We utilize an internallydeveloped modified variance/co-variance value-at-risk “VAR,” model to estimatepotential loss in the fair value of our natural gas portfolio.  For our VAR model, we utilize the higher of10-day and 30-day NYMEX volatility on a 2 standard deviation basis (95.45%confidence level).  During fiscal year2009, volatility in natural gas commodity prices resulted in higher potentiallosses in the fair value of our natural gas portfolio using this VARmodel.  The potential losses in the fixedprice natural gas portfolio using our actual net open position at the end ofeach month during fiscal years 2009 and 2008 are summarized in the followingtable.

 
| ** **                            | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|
| **Potential  loss during the period** | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **(in thousands)**                  | ** ** |
| **Fiscal ended March 31:**       |       |                                |       |   |   |
| Average                               | ** ** | **$**                               | **120**    |   | $ | 108 |   |
| Maximum                               | ** ** | **624**                             |       | 366 |   |
| Minimum                               | ** ** | **25**                              |       | 7 |   |
|                                       |            |                                     |            |  |  |  |  |

 

There have been nomaterial changes in our methodology or policies regarding commodity price riskmanagement during the fiscal year ended June 30, 2009.

 

**CreditRisk**

 

We are exposed to creditrisk in our risk management activities. Credit risk is the risk of loss resulting from the nonperformance by acounterparty of its contractual obligations. Our fixed price positions are executed under agreements that includemaster netting arrangements, which mitigate outstanding credit exposure.  Under our Hedge Facility, our economichedging activities were with a financial institution that has an investmentgrade credit rating as of June 30, 2009. Subsequent to consummation of the Restructuring, our economic hedgingactivities are also with a financial institution that has an investment gradecredit rating.  To the extent we purchasefinancial hedges or physical commodity from other counterparties, our riskpolicy provides for ongoing financial reviews, established credit limits aswell as monitoring, managing and mitigating credit exposure.

 

We also are exposed tocredit risk in our sales activities.  Forthe fiscal year ended June 30, 2009, approximately 55% of our total salesof natural gas and electricity were within markets where LDCs do not guaranteecustomer accounts receivable while 45% of our total sales were within marketswhere LDCs guarantee customer accounts receivable at a weighted averagediscount rate of approximately 1%.  Suchdiscount is the cost incurred to guarantee the customer accountsreceivable.  In cases where customeraccounts receivable are guaranteed by the LDC, we are exposed only to thecredit risk of 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, 2009, all of our customeraccounts receivable in guaranteed markets was with LDCs with investment gradecredit ratings.  We also periodicallyreview payment history and financial information for LDCs to ensure that weidentify and respond to any deteriorating trends.

 

The allowance for doubtfulaccounts represents our estimate of potential credit losses associated withcustomer accounts receivable in markets where such receivables are notguaranteed by LDCs.  We assess theadequacy of our allowance for doubtful accounts through review of the aging ofcustomer accounts receivable and our assessment of the general economicconditions in the markets that we serve. Based upon our review as of June 30, 2009, and for the fiscal yearended, 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,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2009**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                                               |       |                                               |       |   |   |   |   |
| Provision for doubtful accounts as a percentage of  sales of natural gas and electricity in non-guaranteed markets | ** ** | **2.79**                                           | **%**      | 1.19 | % | 0.82 | % |

 

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During fiscal year 2009,we experienced deterioration of the aging of billed customer accountsreceivable within several of our markets, including our largest natural gasmarket in Georgia and in our Texas electricity market, which resulted in anincrease in the provision for doubtful accounts.  We will continue to closely monitor economicconditions and actual collections data within these and other markets for signsof any negative long-term trends which could result in higher allowancerequirements.

 

There have been no materialchanges in our methodology or policies regarding credit risk management duringthe fiscal year ended June 30, 2009.

 

**InterestRate Risk**

 

Effective August 4,2006, we became exposed to fluctuations in interest rates under the FloatingRate Notes due 2011.  As of June 30,2009, $165.2 million aggregate principal of the Floating Rate Notes due 2011was outstanding, before original issue discount.  We entered into interest rate swap agreementsduring fiscal 2007, which are utilized to manage our exposure to interest ratefluctuations on the Floating Rate Notes due 2011.  These agreements effectively convert interestrate exposure from a variable rate to a fixed rate of interest.  As of June 30, 2009, the followinginterest rate swaps were outstanding.

 

·      A $30.0million swap that expires on August 2, 2010 and bears interest at 10.33%per annum; and

·      An$80.0 million swap that expires on August 1, 2011 that bears interest at13.24% per annum.

 

The $30.0 million swapthat was due to expire on August 2, 2010 was terminated in September 2009.  A $50.0 million swap expired on August 1,2008 and was not replaced.

 

All swaps arefixed-for-floating and settle against the six-month LIBOR rate.  None of the interest rate swaps have beendesignated as a hedge and, accordingly, changes in the market value of theinterest rate swaps are charged directly to interest expense.  The additional interest expense associatedwith changes in the market value of interest rate swaps was $3.7 million, $3.3million and $0.9 million for the fiscal years ended June 30, 2009, 2008and 2007, respectively.

 

Our average, high and lowmonth-end balances for the Floating Rate Notes due 2011 during fiscal year2009, net of the aggregate balance of the interest rate swaps, wereapproximately $53.5 million, $55.2 million and $35.2 million,respectively.  Based on the averageoutstanding amount of our variable rate indebtedness under the Floating RateNotes due 2011 during the fiscal years ended June 30, 2009 and 2008, a onepercentage point change in the interest rates, net of the effects of theinterest rate swaps, would have impacted our annual interest expense byapproximately $0.5 million and $0.4 million, respectively.  Based on the average outstanding amount ofvariable rate indebtedness expected for the fiscal year ending June 30,2010, a one percentage point change in the interest rates would impact fiscal2010 interest expense by approximately $0.6 million.

 

The Commodity SupplyFacility requires that the Company novate or unwind the remaining $80.0 millionswap subsequent to closing of the Commodity Supply Facility, with RBS Sempraproviding any necessary credit support to liquidate that position.

 

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**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM AND CONSOLIDATEDFINANCIAL STATEMENTS**

 
| ** **                                                                                                  | **Page** |
|-------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                        |     |
| Report of Independent  Registered Public Accounting Firm                                                    | 66       |
| Consolidated Balance Sheets at  June 30, 2009 and 2008                                                 | 67       |
| Consolidated Statements of  Operations for the years ended June 30, 2009, 2008 and 2007                | 68       |
| Consolidated Statements of  Stockholders’ Equity for the years ended June 30, 2009, 2008 and 2007 | 69       |
| Consolidated  Statements of Cash Flows for the years ended June 30, 2009, 2008 and  2007               | 70       |
| Notes to Consolidated  Financial Statements                                                                 | 71       |

 

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**Report of Independent RegisteredPublic Accounting Firm**

 

The Board of Directorsand StockholdersMXenergy Holdings Inc.

 

We have audited theaccompanying consolidated balance sheets of MXenergy Holdings Inc. as of June 30,2009 and 2008, and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the three years in the periodended June 30, 2009. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. We were not engaged to perform an audit of theCompany’s internal control over financial reporting. Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of MXenergy Holdings Inc. at June 30,2009, and 2008, and the consolidated results of its operations and its cashflows for each of the three years in the period ended June 30, 2009, inconformity with U.S. generally accepted accounting principles.

 

 

Stamford, Connecticut

October 13, 2009

 

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**MXENERGY HOLDINGS INC.**

**Consolidated Balance Sheets**

**(dollars in thousands)**

 
| ** **                                                                                                                        | ** ** | **Balance at June 30,** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|
| ** **                                                                                                                        | ** ** | **2009**                     | ** **  | **2008** | ** ** |
|                                                                                                                              |       |                         |        |   |   |
| **Assets**                                                                                                                        |       |                         |        |   |   |
| Current assets:                                                                                                                   |       |                         |        |   |   |
| Cash and cash equivalents                                                                                                         | ** ** | **$**                        | **23,266**  |   | $ | 71,958 |   |
| Restricted cash                                                                                                                   | ** ** | **75,368**                   |        | 587 |   |
| Accounts receivable, net (Note 6)                                                                                                 | ** ** | **47,598**                   |        | 87,673 |   |
| Natural gas inventories (Note 7)                                                                                                  | ** ** | **29,415**                   |        | 65,006 |   |
| Current portion of unrealized gains from risk  management activities (Note 13)                                                    | ** ** | **294**                      |        | 35,864 |   |
| Income taxes receivable                                                                                                           | ** ** | **6,461**                    |        | 7,524 |   |
| Deferred income taxes (Note 11)                                                                                                   | ** ** | **9,020**                    |        | — |   |
| Other current assets                                                                                                              | ** ** | **12,084**                   |        | 3,361 |   |
| Total current assets                                                                                                              | ** ** | **203,506**                  |        | 271,973 |   |
| Unrealized gains from risk management activities  (Note 13)                                                                       |       | —                       |        | 13,221 |   |
| Goodwill (Note 8)                                                                                                                 | ** ** | **3,810**                    |        | 3,810 |   |
| Customer acquisition costs, net (Note 9)                                                                                          | ** ** | **27,950**                   |        | 41,693 |   |
| Fixed assets, net (Note 10)                                                                                                       | ** ** | **3,728**                    |        | 10,525 |   |
| Deferred income taxes (Note 11)                                                                                                   | ** ** | **15,089**                   |        | 10,503 |   |
| Other assets                                                                                                                      | ** ** | **4,988**                    |        | 4,027 |   |
| Total assets                                                                                                                      | ** ** | **$**                        | **259,071** |   | $ | 355,752 |   |
|                                                                                                                              |       |                         |        |   |   |
| **Liabilities and stockholders’ equity**                                                                                     |       |                         |        |   |   |
| Current liabilities:                                                                                                              |       |                         |        |   |   |
| Accounts payable and accrued liabilities (Note 12)                                                                                | ** ** | **$**                        | **33,300**  |   | $ | 36,602 |   |
| Accrued commodity purchases                                                                                                       | ** ** | **9,847**                    |        | 51,461 |   |
| Current portion of unrealized losses from risk  management activities (Note 13)                                                   | ** ** | **34,224**                   |        | 2,978 |   |
| Deferred revenue                                                                                                                  | ** ** | **4,271**                    |        | 7,435 |   |
| Bridge Financing loans payable (Note 19)                                                                                          | ** ** | **5,400**                    | ** **  | **—** | ** ** |
| Denham Credit Facility (Note 19)                                                                                                  | ** ** | **12,000**                   | ** **  | **—** | ** ** |
| Deferred income taxes (Note 11)                                                                                                   |       | —                       |        | 9,800 |   |
| Total current liabilities                                                                                                         | ** ** | **99,042**                   |        | 108,276 |   |
| Unrealized losses from risk management activities  (Note 13)                                                                      | ** ** | **14,071**                   |        | 2,839 |   |
| Long-term debt:                                                                                                                   |       |                         |        |   |   |
| Floating Rate Notes due 2011 (Note 16)                                                                                            | ** ** | **163,476**                  |        | 162,648 |   |
| Total long-term debt                                                                                                              | ** ** | **163,476**                  |        | 162,648 |   |
| Total liabilities                                                                                                                 | ** ** | **276,589**                  |        | 273,763 |   |
|                                                                                                                              | ** ** | ** **                   |        |   |   |
| Redeemable Convertible Preferred Stock (Note 17)                                                                                  | ** ** | **54,632**                   |        | 48,779 |   |
|                                                                                                                              |       |                         |        |   |   |
| Commitments and contingencies (Note 21)                                                                                           | ** ** | **—**                   |        | — |   |
|                                                                                                                              |       |                         |        |   |   |
| Stockholders’ equity:                                                                                                        |       |                         |        |   |   |
| Common stock, par value $0.01, 10,000,000 shares  authorized; 4,681,219 and 3,604,788 shares issued and outstanding, respectively | ** ** | **47**                       |        | 36 |   |
| Additional paid-in capital                                                                                                        | ** ** | **18,275**                   |        | 23,635 |   |
| Unearned stock compensation                                                                                                       | ** ** | **—**                   |        | (4 | ) |
| Accumulated other comprehensive loss                                                                                              | ** ** | **(3**                       | **)**       | (189 | ) |
| (Accumulated deficit) retained earnings                                                                                           | ** ** | **(90,469**                  | **)**       | 9,732 |   |
| Total stockholders’ equity                                                                                                   | ** ** | **(72,150**                  | **)**       | 33,210 |   |
| Total liabilities and stockholders’ equity                                                                                   | ** ** | **$**                        | **259,071** |   | $ | 355,752 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

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**MXENERGY HOLDINGS INC.**

**Consolidated Statements of Operations**

**(dollars in thousands)**

 
| ** **                                                                          | ** ** | **Fiscal Years  Ended June 30,** | ** **   |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------|--------------|
| ** **                                                                          | ** ** | **2009**                                   | ** **   | **2008** | ** ** | **2007** | ** ** |
|                                                                                |       |                                       |         |   |   |   |   |
| Sales of natural gas and electricity                                                | ** ** | **$**                                      | **789,780**  |   | $ | 752,283 |   | $ | 703,926 |   |
| Cost of goods sold (excluding depreciation and  amortization):                      |       |                                       |         |   |   |   |   |
| Cost of natural gas and electricity sold                                            | ** ** | **596,747**                                |         | 630,006 |   | 552,028 |   |
| Realized losses from risk management activities, net                                | ** ** | **72,824**                                 |         | 6,747 |   | 33,039 |   |
| Unrealized losses (gains) from risk management  activities, net                     | ** ** | **87,575**                                 |         | (67,168 | ) | 17,079 |   |
| ** **                                                                          | ** ** | **757,146**                                |         | 569,585 |   | 602,146 |   |
| Gross profit                                                                        | ** ** | **32,634**                                 |         | 182,698 |   | 101,780 |   |
|                                                                                |       |                                       |         |   |   |   |   |
| Operating expenses:                                                                 |       |                                       |         |   |   |   |   |
| General and administrative expenses                                                 | ** ** | **59,957**                                 |         | 62,271 |   | 54,516 |   |
| Advertising and marketing expenses                                                  | ** ** | **2,117**                                  |         | 4,546 |   | 4,044 |   |
| Reserves and discounts                                                              | ** ** | **15,130**                                 |         | 7,130 |   | 4,725 |   |
| Depreciation and amortization                                                       | ** ** | **37,575**                                 |         | 32,698 |   | 27,730 |   |
| Total operating expenses                                                            | ** ** | **114,779**                                |         | 106,645 |   | 91,015 |   |
|                                                                                |       |                                       |         |   |   |   |   |
| Operating (loss) profit                                                             | ** ** | **(82,145**                                | **)**        | 76,053 |   | 10,765 |   |
| Interest expense (net of interest income of $430,  $3,806 and $4,258, respectively) | ** ** | **45,305**                                 |         | 34,105 |   | 33,058 |   |
| (Loss) income before income tax benefit (expense)                                   | ** ** | **(127,450**                               | **)**        | 41,948 |   | (22,293 | ) |
| Income tax benefit (expense)                                                        | ** ** | **27,249**                                 |         | (17,155 | ) | 8,495 |   |
| Net (loss) income                                                                   | ** ** | **$**                                      | **(100,201** | **)** | $ | 24,793 |   | $ | (13,798 | ) |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

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**MXENERGY HOLDINGS INC.**

**Consolidated Statements ofStockholders’ Equity**

**(dollars in thousands)**

 
| ** **                                             | ** ** | **Common  Stock  (Par Value)** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Unearned  Stock  Compensation** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **(Accumulated  Deficit)  Retained  Earnings** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------|------------|
|                                                   |       |                                |       |                             |       |                              |       |                                        |       |                                           |       |                                  |       |
| Balance at June 30, 2006                          |       | $                                   | 34         |                             | $          | 17,355                            |       | $                                           | (115       | )                                              | $          | (40                                   | )          | $ | 18,159 |   | $ | 35,393 |   |
| Issuance of common stock                               |       | —                              |       | 22                               |       | —                            |       | —                                      |       | —                                         |       | 22                                    |       |
| Unamortized stock compensation                         |       | —                              |       | 2,219                            |       | (2,219                            | )          | —                                      |       | —                                         |       | —                                |       |
| Purchase and cancellation of treasury shares           |       | —                              |       | (654                             | )          | —                            |       | —                                      |       | —                                         |       | (654                                  | )          |
| Stock compensation expense                             |       | —                              |       | 2,227                            |       | —                            |       | —                                      |       | —                                         |       | 2,227                                 |       |
| Tax benefit on issuance of common stock from options   |       | —                              |       | 198                              |       | —                            |       | —                                      |       | —                                         |       | 198                                   |       |
| Amortization of stock compensation                     |       | —                              |       | —                           |       | 2,312                             |       | —                                      |       | —                                         |       | 2,312                                 |       |
| Comprehensive income (loss):                           |       |                                |       |                             |       |                              |       |                                        |       |                                           |       |                                  |       |
| Net loss                                               |       | —                              |       | —                           |       | —                            |       | —                                      |       | (13,798                                        | )          | (13,798                               | )          |
| Foreign currency translation                           |       | —                              |       | —                           |       | —                            |       | (89                                         | )          | —                                         |       | (89                                   | )          |
| Comprehensive loss                                     |       |                                |       |                             |       |                              |       |                                        |       |                                           |       | (13,887                               | )          |
|                                                   |       |                                |       |                             |       |                              |       |                                        |       |                                           |       |                                  |       |
| 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 loss                                               |       | —                              |       | —                           |       | —                            |       | —                                      | ** ** | **(100,201**                                   | **)**      | **(100,201**                          | **)**      |
| Foreign currency translation                           |       | —                              |       | —                           |       | —                            | ** ** | **186**                                     |       | —                                         | ** ** | **186**                               | ** ** |
| Comprehensive loss                                     |       | —                              |       | —                           |       | —                            |       | —                                      |       | —                                         | ** ** | **(100,015**                          | **)**      |
| Balance at June 30, 2009                          | ** ** | **$**                               | **47**     | ** **                       | **$**      | **18,275**                        | ** ** | **$**                                       | —     | ** **                                     | **$**      | **(3**                                | **)**      | **$** | **(90,469** | **)** | **$** | **(72,150** | **)** |

 

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

 

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**MXENERGY HOLDINGS INC.**

**Consolidated Statements of Cash Flows**

**(dollars in thousands)**

 
| ** **                                                                                                                 | ** ** | **Fiscal Years Ended June 30,** | ** **   |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|--------------|
| ** **                                                                                                                 | ** ** | **2009**                                            | ** **   | **2008** | ** ** | **2007** | ** ** |
| **Operating activities:**                                                                                                  |       |                                                |         |   |   |   |   |
| Net (loss) income                                                                                                          | ** ** | **$**                                               | **(100,201** | **)** | $ | 24,793 |   | $ | (13,798 | ) |
| Adjustments to reconcile net (loss) income to net  cash (used in) provided by operating activities:                        |       |                                                |         |   |   |   |   |
| Unrealized losses (gains) from risk management  activities                                                                 | ** ** | **87,575**                                          |         | (67,168 | ) | 17,079 |   |
| Stock compensation expense                                                                                                 | ** ** | **519**                                             |         | 1,704 |   | 4,539 |   |
| Depreciation and amortization                                                                                              | ** ** | **37,575**                                          |         | 32,698 |   | 27,730 |   |
| Deferred income tax (benefit) expense                                                                                      | ** ** | **(23,406**                                         | **)**        | 18,187 |   | (14,449 | ) |
| Non-cash interest expense, primarily unrealized  losses on interest rate swaps and amortization of deferred financing fees | ** ** | **16,233**                                          |         | 10,836 |   | 7,906 |   |
| Amortization of customer contracts acquired                                                                                | ** ** | **(634**                                            | **)**        | (762 | ) | 11,891 |   |
| Changes in assets and liabilities, net of effects of  acquisitions:                                                        |       |                                                |         |   |   |   |   |
| Restricted cash                                                                                                            | ** ** | **(74,781**                                         | **)**        | 463 |   | (623 | ) |
| Accounts receivable                                                                                                        | ** ** | **40,075**                                          |         | (30,181 | ) | 3,453 |   |
| Natural gas inventories                                                                                                    | ** ** | **36,509**                                          |         | (7,308 | ) | (1,712 | ) |
| Income taxes receivable                                                                                                    | ** ** | **1,063**                                           |         | (7,173 | ) | 5,184 |   |
| Option premiums                                                                                                            | ** ** | **1,571**                                           |         | 1,191 |   | 1,835 |   |
| Other assets                                                                                                               | ** ** | **(20,509**                                         | **)**        | 609 |   | (993 | ) |
| Accounts payable, accrued commodity purchases and  other accrued liabilities                                               | ** ** | **(46,553**                                         | **)**        | 17,882 |   | 31,555 |   |
| Deferred revenue                                                                                                           | ** ** | **(3,164**                                          | **)**        | (4,352 | ) | 9,384 |   |
| Net cash (used in) provided by operating activities                                                                        | ** ** | **(48,128**                                         | **)**        | (8,581 | ) | 88,981 |   |
|                                                                                                                       |       |                                                |         |   |   |   |   |
| **Investing activities:**                                                                                                  |       |                                                |         |   |   |   |   |
| Purchase of Catalyst 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                                                                                                  |       | —                                              |         | (12,427 | ) | — |   |
| Purchase of SESCo assets                                                                                                   | ** ** | **—**                                          |         | — |   | (126,044 | ) |
| Return of deposit related to purchase of SESCo  assets                                                                     | ** ** | **—**                                          |         | — |   | 3,348 |   |
| Purchase of Vantage assets                                                                                                 | ** ** | **—**                                          |         | — |   | (732 | ) |
| Customer acquisition costs                                                                                                 | ** ** | **(15,343**                                         | **)**        | (19,555 | ) | (7,610 | ) |
| Purchases of fixed assets                                                                                                  | ** ** | **(1,001**                                          | **)**        | (1,959 | ) | (1,882 | ) |
| Net cash used in investing activities                                                                                      | ** ** | **(17,953**                                         | **)**        | (33,941 | ) | (132,920 | ) |
|                                                                                                                       |       |                                                |         |   |   |   |   |
| **Financing activities:**                                                                                                  |       |                                                |         |   |   |   |   |
| Proceeds from Denham Credit Facility                                                                                       | ** ** | **12,000**                                          |         | — |   | 23,040 |   |
| Repayments of Denham Credit Facility                                                                                       |       | —                                              |         | (11,040 | ) | (12,000 | ) |
| Proceeds from cash advanced under the Revolving Credit  Facility                                                           | ** ** | **30,000**                                          |         | — |   | — |   |
| Repayment of cash advances under the Revolving  Credit Facility                                                            | ** ** | **(30,000**                                         | **)**        | — |   | — |   |
| Proceeds from Bridge Financing under the Revolving  Credit Facility                                                        | ** ** | **10,400**                                          |         | — |   | — |   |
| Repayment of Bridge Financing under the Revolving  Credit Facility                                                         | ** ** | **(5,000**                                          | **)**        | — |   | — |   |
| Proceeds from other loans                                                                                                  | ** ** | **—**                                          |         | — |   | 6,000 |   |
| Repayments of other loans                                                                                                  | ** ** | **—**                                          |         | — |   | (6,000 | ) |
| Debt financing costs                                                                                                       | ** ** | **—**                                          |         | — |   | (9,345 | ) |
| Proceeds from bridge loan                                                                                                  | ** ** | **—**                                          |         | — |   | 190,000 |   |
| Repayment of bridge loan                                                                                                   | ** ** | **—**                                          |         | — |   | (190,000 | ) |
| Proceeds from Floating Rate Notes due 2011                                                                                 | ** ** | **—**                                          |         | — |   | 185,250 |   |
| Repurchase of Floating Rate Notes due 2011                                                                                 | ** ** | **—**                                          |         | (12,006 | ) | (11,723 | ) |
| Issuance of common stock from exercise of warrants  and options                                                            | ** ** | **—**                                          |         | 387 |   | 22 |   |
| Issuance of common stock from other executive  compensation                                                                | ** ** | **—**                                          |         | 952 |   | — |   |
| Purchase and cancellation of treasury shares, net of  tax benefit                                                          | ** ** | **(11**                                             | **)**        | (755 | ) | (456 | ) |
| Net cash provided by (used in) financing activities                                                                        | ** ** | **17,389**                                          |         | (22,462 | ) | 174,788 |   |
| Net (decrease) increase in cash                                                                                            | ** ** | **(48,692**                                         | **)**        | (64,984 | ) | 130,849 |   |
| Cash and cash equivalents at beginning of year                                                                             | ** ** | **71,958**                                          |         | 136,942 |   | 6,093 |   |
| Cash and cash equivalents at end of year                                                                                   | ** ** | **$**                                               | **23,266**   |   | $ | 71,958 |   | $ | 136,942 |   |
|                                                                                                                       |       |                                                |         |   |   |   |   |
| **Supplemental cash flow information:**                                                                                    |       |                                                |         |   |   |   |   |
| Income taxes paid                                                                                                          | ** ** | **$**                                               | **431**      |   | $ | 5,405 |   | $ | 753 |   |
| Interest paid                                                                                                              | ** ** | **$**                                               | **31,616**   |   | $ | 29,426 |   | $ | 17,345 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

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**MXENERGY HOLDINGS INC.**

**Notes to Consolidated Financial Statements**

 

***Note 1.****** ******Organization***

 

MXenergy Holdings Inc. (“Holdings”),originally founded in 1999 as a retail energy marketer, was incorporated as aDelaware corporation on January 24, 2005 as part of a corporate reorganization.  The two principal operating subsidiaries ofHoldings, MXenergy Inc. and MXenergy Electric Inc., are engaged in themarketing and supply of natural gas and electricity, respectively.  Holdings and its subsidiaries (collectively,the “Company”) operate in 39 market areas located in 14 states in the UnitedStates (the “U.S.”) and two Canadian provinces.

 

***Note 2.****** ******SignificantAccounting Policies***

 

**Basisof Presentation**

 

The accounting andreporting policies of the Company conform to accounting principles generallyaccepted 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.

 

**Principlesof Consolidation**

 

The Company owns 100% ofall of its subsidiaries.  Accordingly,the consolidated financial statements include the accounts of Holdings and allof its subsidiaries.  Intercompanyaccounts and transactions have been eliminated in consolidation.

 

**Useof Estimates and Assumptions**

 

The preparation offinancial statements in accordance with U.S. GAAP requires management to makeestimates and assumptions that affect amounts reported in the consolidatedfinancial statements and accompanying notes. Estimates used in connection with revenue recognition, fair valuemeasurements, allowance for doubtful accounts, valuation of goodwill and otherintangible assets, tax-related reserves and share-based compensation are oftencomplex and may significantly impact the amounts reported for those items.  Although management uses its best judgmentbased on information available at the time such judgments are made, actualresults could differ from estimated amounts.

 

**RevenueRecognition**

 

*Sales ofNatural Gas and Electricity*

 

Revenues from the sale ofnatural gas and electricity are recognized in the period in which the commodityis consumed by customers.  Sales ofnatural gas and electricity are generally billed by the local distributioncompanies (“LDCs”), acting as the Company’s agent, on a monthly cycle basis,although the Company performs its own billing for certain of its marketareas.  The billing cycles for customersdo not coincide with the accounting periods used for financial reportingpurposes.  The Company follows theaccrual 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.

 

*PassthroughRevenues*

 

Revenues also includecertain “passthrough” revenues, which represent transportation charges billedto customers by certain LDCs.  Theserevenues are offset by corresponding amounts in cost of goods sold for amountsbilled to the Company by the LDC.

 

*FeesCharged to Customers*

 

Various fees charged tocustomers, such as late payment fees, early contract termination fees, serviceshut-off fees and fees charged to customers for providing copies of bills, aregenerally recorded as revenue when collection is deemed to be reasonablyassured.  Late payment fees charged inall markets, and various other fees charged in certain markets are recorded asrevenue when billed to the customer. Certain other fees are recorded as revenue when actually collected fromthe customer.

 

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*DeferredRevenue*

 

Customers who are onbudget-billed plans pay for their natural gas or electricity at ratable monthlyamounts, based on estimated annual usage, while the Company records revenuewhen the commodity is consumed by the customer. The cumulative difference between actual usage for these customers andthe budget-billed amount actually invoiced, net of cash payments made by thecustomers, is equal to the net budget-billed variance.  If the net budget-billed variance is areceivable from the customer at the balance sheet date, indicating that thecustomer’s actual usage has exceeded amounts billed to the customer, the amountis reported as accounts receivable in the consolidated balance sheets.  If the net budget-billed variance is aliability to the customer, indicating that amounts billed have exceeded actualusage, the amount is reported as deferred revenue in the consolidated balancesheets.

 

*SalesIncentives*

 

Cash rebates paid tocustomers under the terms of certain product agreements are recorded as areduction of sales revenue.  Non-cashincentives, such as free products or services, are recorded as marketingexpenses.

 

*Collections of Sales Tax*

 

Sales tax is added to customerbills for many of the markets served by the Company.  Sales tax collected from customers on behalfof governmental entities is recorded in accounts payable and accruedliabilities on the consolidated balance sheets.

 

**FairValue of Financial Instruments**

 

The fair value of afinancial instrument is the amount at which the instrument could be exchangedin a current transaction between willing parties, other than in a forced orliquidation sale.  Where available, theCompany uses quoted market prices as estimates of the fair value of financialinstruments.  For financial instrumentswithout quoted market prices, fair value represents management’s best estimatebased on a range of methods and assumptions, which are described below.  The use of different assumptions couldsignificantly 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*

 

The carrying value ofcertain financial assets and liabilities carried at cost is considered toapproximate fair value because they are short-term in nature, bear interestrates that approximate market rates and generally have minimal credit risk.  These items include cash and cashequivalents, restricted cash, accounts receivable, accounts payable and accruedliabilities, accrued commodity purchases, deferred revenue and short-termfinancing arrangements.

 

The Company had $22.1million and $68.5 million invested in money market funds at June 30, 2009and 2008, respectively.  Each share ofthe money market funds was valued at $1.00 at June 30, 2009 and 2008.

 

*Derivatives*

 

Derivatives are recordedat fair value.  Since the Company has notelected to designate any derivatives as accounting hedges, any changes in fairvalue are adjusted through unrealized losses (gains) from risk managementactivities, net (for commodity derivatives) or interest expense, net ofinterest 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.

 

As of June 30, 2009,natural gas derivative instruments are generally with a single counterpartyunder the Company’s primary hedge facility and the Company uses variouscounterparties for electricity derivative instruments.  The Company generally enters into masternetting agreements with hedge counterparties****forsettlement of derivative fair value assets and liabilities.  The Company records such fair value assetsand liabilities net on the consolidated balance sheets.

 

The recorded fair valuesof derivative instruments reflect management’s best estimate of market value,which takes into account various factors including closing exchange andover-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.

 

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*Long-term Debt*

 

At June 30, 2009,long-term debt includes the aggregate outstanding principal amount of FloatingRate Notes due 2011.  The carrying valuesof long-term debt instruments are not necessarily indicative of fair value dueto changing market conditions and terms for similar unsecured instruments.  The Company has elected not to record thesefinancial instruments at fair value at June 30, 2009.

 

**ForeignCurrency Translation**

 

The Company has Canadianoperations that are measured using Canadian dollars as the functionalcurrency.  Assets and liabilities aretranslated into U.S. dollars at the rate of exchange in effect on the balancesheet date.  Income and expenses aretranslated at the average daily exchange rate for the month of activity.  Net exchange gains or losses resulting fromsuch translation are included in common stockholders’ equity as a component ofaccumulated other comprehensive loss.

 

**Cashand Cash Equivalents**

 

The Company’s cash andcash equivalents consist primarily of cash on deposit and money marketaccounts.

 

**RestrictedCash**

 

Restricted cash consistsof: (1) cash and money market funds required as security for letters ofcredit issued under the Company’s Revolving Credit Facility; (2) cash andmoney market funds required as security for surety bonds required by LDCs,utility commissions and pipeline tariffs and regulations; (3) money marketfunds held in escrow as contingent consideration related to acquisitions; and (4) cashdeposits received from customers.

 

**AccountsReceivable and Allowance for Doubtful Accounts**

 

The Company deliversnatural gas and electricity to its customers through LDCs, many of whichguarantee 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. Forthose markets where accounts receivable are guaranteed by LDCs, the Companypays guarantee discounts that average approximately 1% of billed accountsreceivable, which are charged to reserves and discounts in the consolidatedstatements of operations as revenue is billed. The Company does not maintain an allowance for doubtful accounts relatedto accounts receivable in these guaranteed markets, as it does not expect toincur material credit losses from any of the respective LDC’s.

 

In markets where no LDCguarantees exist, the Company calculates and records an allowance for doubtfulaccounts based on aging of accounts receivable balances, collections history,past loss experience and other current economic or other trends.  Charge offs of accounts receivable balancesare recorded as reductions of the allowance for doubtful accounts during themonth when the accounts are transferred to outside collection agencies.  Delinquency status for customer accounts isbased on the number of days an account balance is outstanding past an invoicedue date.  Accounts are generallyreviewed for transfer to collection agencies by 120 days from the initialinvoice date.  Recoveries of accountsreceivable balances previously charged off are recorded when received asreductions from reserves and discounts in the consolidated statements ofoperations.  Adjustments to record theallowance for doubtful accounts at calculated month-end balances are recordedin reserves and discounts in the consolidated statements of operations.

 

Accounts receivable alsoincludes cash imbalance settlements that represent the value of excess naturalgas delivered to LDCs for consumption by our customers and actual customerusage.   Such imbalances are expected tobe settled in cash in accordance with contractual payment arrangements.  The Company bears credit risk related toimbalance settlement receivables to the extent that such LDCs are unable tocollect imbalance settlements payable to them by other retail marketers.  The Company records an allowance for doubtfulaccounts during the month that full collection of any such imbalance receivablebalance becomes doubtful, with a corresponding charge to reserves and discounts.

 

**NaturalGas Inventories**

 

Natural gas inventoriesinclude natural gas held in storage by third parties on the Company’s behalf,which are valued at the lower of cost or market value on a weighted-averagecost basis.  The weighted-average cost ofinventory includes related transportation and storage costs.

 

Natural gas inventoriesalso include estimated commodity delivery/usage imbalance settlement amountsthat represent natural gas to be transferred to the Company from various thirdparties within the upcoming twelve-month period.

 

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Adjustments to the valueof natural gas inventories on the consolidated balance sheets result incorresponding adjustments to cost of goods sold on the consolidated statementsof operations.  Such adjustments resultfrom changes in inventory storage levels as natural gas is delivered to customersas well as changes in the weighted average cost of natural gas in storage.

 

**OtherCurrent Assets**

 

Other current assetsprimarily include: (1) security deposits placed with commodity and othersuppliers as collateral for future purchases in lieu of letters of credit orother credit enhancements; and (2) prepaid expenses and deferred charges,which include costs incurred that pertain to future benefit periods notexceeding twelve months.  These costs areamortized to appropriate expense lines on the consolidated statement ofoperations over their estimated benefit period.

 

**BusinessCombinations and Goodwill**

 

Since its organization in1999, the Company has acquired natural gas and electricity operations ofnumerous energy companies, each of which was recorded as a purchase businesscombination.  For all purchase businesscombinations recorded through June 30, 2009, the purchase price wasallocated to the net assets acquired based on their estimated fair values atthe acquisition date.  Costs incurred toeffect the purchase business combination transaction (e.g., legal, accounting,valuation and other professional or consulting fees) were added to the costs ofthe acquisition 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 twelve monthssubsequent to the acquisition date as new or revised information becameavailable.

 

Effective July 1,2009, the Company adopted the provisions of Financial Accounting StandardsBoard (“FASB”) Statement of Financial Accounting Standards No. 141(R), “BusinessCombinations” (“SFAS No. 141(R)”), which establishes principles andrequirements for an acquiring company to recognize and measure in its financialstatements the identifiable assets acquired, liabilities assumed, goodwillacquired, any gain from a bargain purchase, and any noncontrolling interest inan acquired company.  Under SFAS No. 141(R),assets acquired and liabilities assumed for purchase business combinationsafter June 30, 2009, if any, will to be recorded at their estimated fairvalues, regardless of their cost. Additionally, costs incurred to effect such transactions will berecognized separately from the acquisition transaction and generally beexpensed during the periods in which the costs are incurred and the servicesare received.  Finally, restructuringcosts that the Company was not obligated to incur will also be recognizedseparately from the purchase business combination transaction.

 

The Company hasdetermined that its natural gas and electricity reporting units correspond withits business segments for management and financial reporting purposes.

 

As of June 30, 2009,goodwill of $3.8 million represents the excess of purchase price over the fairvalue of identifiable natural gas net assets acquired from Shell EnergyServices Company L.L.C. (“SESCo”) in August 2006.   The Company has assigned this goodwill toits natural gas business segment. Goodwill is not amortized, but rather is reviewed for impairment atleast annually or more frequently if events or changes in circumstances indicatethat the carrying amount may not be recoverable.  Goodwill is tested for impairment annually atJune 30.  The Company utilizes adiscounted cash flow methodology for its impairment testing, which givesconsideration to significant and long-term changes in industry and economicconditions as primary indicators of potential impairment.

 

**CustomerAcquisition Costs, Net**

 

Customer acquisitioncosts are comprised of: (1) customer contracts acquired through bulkacquisitions and business combinations; and (2) direct sales andadvertising costs, which consist primarily of direct-response hourlytelemarketing, non-hourly telemarketing and door-to-door marketing costsincurred through independent third parties, and which are associated withproven customer generation.

 

For customer contractsacquired through bulk acquisitions and business combinations, acquisition costsare recorded at their fair value on the acquisition date and amortized on astraight-line basis over the estimated life of the customers acquired.  Non-hourly telemarketing and door-to-doorcosts represent incremental direct costs related to arrangements withthird-party contractors.  The Companycurrently estimates a three-year life for these assets.

 

Direct-responsetelemarketing costs are capitalized to the extent that: (1) their purposewas to elicit sales to customers; (2) customers have respondedspecifically to the advertising; and (3) probable future economic benefitresults from the activity.  Such costsare amortized over the period during which the future economic benefits areexpected to be realized.

 

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The Company currentlyestimates a three-year benefit period for these assets.  Periodic amortization expense is calculatedon a cost-pool-by-cost-pool basis, and is based on the current revenuesgenerated for a cost-pool in relation to the total current and future estimatedrevenues for that cost-pool.

 

Amortization of customeracquisition costs is recorded in depreciation and amortization on theconsolidated statements of operations. Advertising and marketing costs not recorded as customer acquisitioncosts are expensed as incurred by the Company and recorded as advertising andmarketing expenses on the consolidated statements of operations.

 

Customer acquisitioncosts are reviewed for recoverability on a quarterly basis, or whenever eventsor changes in circumstances indicate that their carrying amount may not berecoverable.  In the event thatrecoverability of the entire carrying amount of the recorded asset becomesdoubtful, the non-discounted future cash flows expected to result from the useof the asset and its eventual disposition will be estimated.  If the sum of the expected cash flows to begenerated by the asset is less than the carrying amount, the Company wouldrecognize an impairment loss and adjust the carrying value accordingly.  The adjusted carrying amount of the assetwould then become its new cost basis, and would be amortized over the remaininguseful life of that asset.

 

**FixedAssets, Net**

 

Fixed assets consistprimarily of computer hardware and software, office equipment andfurniture.  Fixed assets are stated atcost 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. Depreciation expense is reported in depreciation and amortization on theconsolidated statements of operations. Costs of maintenance and repairs to fixed assets are generally expensedas incurred, and reported in general and administrative expenses on the consolidatedstatements of operations.

 

**CapitalizedSoftware Costs**

 

The Company capitalizescosts of software acquisition and development projects, including costs relatedto software design, configuration, coding, installation, testing and parallelprocessing.  Capitalized software costsare recorded in fixed assets, net of accumulated amortization, on theconsolidated balance sheets.  Capitalizedsoftware development costs generally include:

 

·      external direct costs of materials andservices consumed to obtain or develop software for internal use;

·      payroll and payroll-related costs foremployees who are directly associated with and who devote time to the project,to the extent of time spent directly on the project;

·      costs to obtain or develop software thatallows for access or conversion of old data by new systems;

·      costs of upgrades and/or enhancementsthat result in additional functionality for existing software; and

·      interest costs incurred while developinginternal-use software that could have been avoided if the expenditures had notbeen made.

 

The followingsoftware-related costs are generally expensed as incurred and recorded ingeneral and administrative expenses on the consolidated statements ofoperations:

 

·      research costs, such as costs related tothe determination of needed technology and the formulation, evaluation andselection of alternatives;

·      costs to determine system performancerequirements for a proposed software project;

·      costs of selecting a vendor for acquiredsoftware;

·      costs of selecting a consultant to assistin the development or installation of new software;

·      internal or external training costsrelated to software;

·      internal or external maintenance costsrelated to software;

·      costs associated with the process ofconverting data from old to new systems, including purging or cleansingexisting data, reconciling or balancing of data in the old and new systems andcreation of new data;

·      updates and minor modifications; and

·      fees paid for general systems consultingand overall control reviews that are not directly associated with thedevelopment of software.

 

The costs of computersoftware obtained or developed for internal use is amortized on a straight-linebasis 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

 

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the consolidatedstatements of operations.  The Company’samortization period does not exceed five years for any capitalized softwareproject.

 

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

 

·      existing software is not expected toprovide future service potential;

·      it is no longer probable that softwareunder development will be completed and placed in service; and

·      costs of developing or modifyinginternal-use software significantly exceed expected development costs or costsof comparable third-party software.

 

**IncomeTaxes**

 

The Company files aconsolidated federal U.S. income tax return that includes all of itsconsolidated 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.

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamount of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes using enacted tax rates expected to be ineffect 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.

 

**Derivativesand Hedging Activities**

 

*Commodity Derivatives*

 

The Company utilizesderivative financial instruments to reduce its exposure to fluctuations in theprice of natural gas and electricity. Commodity derivatives utilized typically include, swaps forwards andoptions that are bilateral contracts with counterparties.  In addition, certain contracts with customersare also accounted for as derivatives. The Company has not elected to designate any derivative instruments ashedges under U.S. GAAP guidelines. Accordingly, any changes in fair value during the term of a derivativecontract are adjusted through unrealized losses (gains) from risk managementactivities in the consolidated statements of operations with offsettingadjustments to unrealized gains or unrealized losses from risk managementactivities in the consolidated balance sheets. Unrealized gains from risk management activities on the consolidatedbalance sheets represent receivables from various derivative counterparties,net of amounts due to the same counterparties when master netting agreementsexist.  Unrealized losses from riskmanagement activities represent liabilities to various derivativecounterparties, net of receivables from the same counterparties when masternetting agreements exist.  Settlements onthe derivative instruments are realized monthly and are generally based uponthe difference between the contract price and the closing price as quoted onthe New York Mercantile Exchange (“NYMEX”) or other published index.

 

The recorded fair valuesof derivative instruments reflect management’s best estimate of market value,which takes into account various factors including closing exchange andover-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.

 

The Company also utilizescertain physical forward commodity purchase and sale contracts to reduceexposure to fluctuations in the price of natural gas and electricity, which aredeemed to be “normal purchases and normal sales” under U.S. GAAPguidelines.  Accordingly, such contractsare not carried on the balance sheet at fair value.  All contracts documented for the “normalpurchases and normal sales” exception are accounted for as executory contractswith the corresponding purchase and sale recorded for accounting purposes atthe settlement date.

 

*Interest Rate Swaps*

 

The Company utilizesinterest rate swaps to reduce its exposure to interest rate fluctuationsrelated to its Floating Rate Notes due 2011. The swaps are fixed-for-floating and settle against the six month LIBORrate.  None of the interest rate swapshas been designated as a hedge, and accordingly, these instruments are carriedat fair value on the consolidated balance sheets with changes in fair valuerecorded as adjustments to interest expense.

 

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**Debt**

 

Debt instruments arerecorded at their face amounts on the consolidated balance sheets, less anydiscount or plus any premium.  Debtintended to be repaid within one year is classified as a current liability.

 

*Debt Issue Discounts and Debt Issue Costs*

 

Debt issue discounts arerecorded as decreases to recorded debt balances and are amortized to interestexpense over the remaining life of the related debt instrument.  Certain costs that are directly related tothe issuance of debt, such as financing transaction fees, underwriting fees,legal fees and other professional services, are deferred and recorded in otherassets on the Company’s consolidated balance sheets and amortized to interestexpense over the remaining life of the related debt instrument.  In the event that debt instruments arepartially or entirely repaid by the Company, a pro rata portion of relateddiscount and debt issue costs are recorded as an adjustment to interest expense.

 

*Early Extinguishment of Debt*

 

During the period from August 2006through June 30, 2009, the Company purchased approximately $24.8 millionin aggregate principal amount of Floating Rate Notes due 2011 from the holdersof the notes.  These transactions wererecorded as early extinguishments of debt. Gains from these transactions, which result from the discounts paid bythe Company for outstanding Floating Rate Notes due 2011, are recorded asadjustments to interest expense.

 

*Interest Expense*

 

Interest expense includesinterest accrued for various debt instruments, certain fees paid for issuanceof letters of credit and other transactions related to the Company’s creditagreements, amortization of debt issue discount and amortization of deferreddebt issue costs.   Interest expense onthe consolidated statements of operations is presented net of interest incomeearned from cash and cash equivalents and restricted investments.

 

**RedeemableConvertible Preferred Stock**

 

Redeemable convertiblepreferred stock (the “Preferred Stock”) is recorded outside of stockholders’equity on the consolidated balance sheets since it is deemed to be redeemableat the option of the holders of the Preferred Stock.  Since the Company has determined that it isprobable that the Preferred Stock became redeemable at June 30, 2009, thePreferred Stock is recorded at its estimated redemption value as of June 30,2009.

 

The agreement thatgoverns the Preferred Stock contains various provisions for redemption of thePreferred Stock, for conversion of the Preferred Stock to common stock and forpreferences of the holders of the Preferred Stock should the Company beliquidated.  Should any of these eventsoccur, the holders of the Preferred Stock are guaranteed a minimum return of12% per annum, compounded annually, from the June 30, 2004 issue datethrough the date of the redemption, conversion or liquidation event.  Adjustments to the carrying value of thePreferred Stock as a result of any of these events are recorded as a chargeagainst retained earnings or, in the absence of retained earnings, by chargesagainst additional paid-in capital.  On September 22,2009, the Preferred Stock was converted into the newly authorized Class CCommon Stock.  As of September 22,2009, no Preferred Stock is outstanding.

 

**StockBased Compensation**

 

As of June 30, 2009,the Company had three stock-based compensation plans in effect, under whichstock options to acquire the Company’s common stock have been granted toemployees, directors and other non-employees of the Company.  In addition, the Company has issued warrantsto purchase its common stock to certain employees and non-employees that werenot issued under any of its three approved stock-based compensation plans.  Refer to Note 18 for additional informationregarding the Company’s stock based compensation plans and its grants ofoptions and warrants.

 

Compensation expenserelated to all awards of options and warrants is recorded in general andadministrative expenses in the consolidated statements of operations.

 

*Awards of Stock Options to Acquire the Company’s CommonStock*

 

For stock option awardsgranted after June 30, 2006, the Company recognizes compensation expenseprospectively over the vesting period. Compensation expense for option awards subject to graded vesting isrecognized based on the accelerated attribution method as specified under U.S.GAAP guidelines.  The fair value of eachoption award granted subsequent to

 

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June 30, 2006 isestimated on the grant date using a Black-Scholes-Merton option valuationmodel.  Certain key assumptions used inthe model included share price volatility, expected term, risk-free interestrate and expected forfeiture rate.  Totalcompensation expense to be recognized over the vesting period is based on: (1) thefair value of the Company’s common stock at the quarterly reporting date (e.g.,September 30, December 31, March 31 and June 30)immediately prior to the grant date, as determined by an independent valuationof the Company’s common stock or internally developed valuation models; and (2) thetotal number of options expected to be exercised, net of expected forfeitures.  The cumulative effect on current and priorperiods of a change in the number of options expected to be exercised, net offorfeitures, is recognized in compensation expense in the period of the change.

 

The Company has electedto follow APB No. 25, and related interpretations, in accounting for stockoption awards granted to employees prior to June 30, 2006, rather than thealternative fair value method allowed under SFAS No. 123.  APB No. 25 provides that compensationexpense relative to the Company’s employee stock and stock option grants bemeasured based on the intrinsic value of the stock or stock option at the grantdate.  Pursuant to APB No. 25, foroptions granted to employees prior to June 30, 2006, the Company was notrequired to recognize compensation expense during the fiscal years ended June 30,2009, 2008 or 2007 because the exercise price for all such awards equaled orexceeded the estimated fair value of the Company’s common stock at the grantdate.

 

*Awards of Warrants to Acquire the Company’s Common Stock*

 

Prior to June 30,2006, the Company issued warrants to certain employees and non-employees thatpermit the warrant holder the option to: (1) exercise such warrant forcash; or (2) exercise by withholding that number of common shares having atotal fair value equal to the warrant exercise amount from the total number ofcommon shares that would otherwise have been issued upon exercise of thewarrant (a “cashless exercise”). Compensation cost is accrued as a charge to expense over the vestingperiod of such warrants using the accelerated expense attribution method underFASB Interpretation No. 28 “Accounting for Stock Appreciation Rights andOther Variable Stock Option or Award Plans.” For these awards, it is presumed that the employee will elect thecashless exercise and compensation expense is adjusted periodically to reflectthe amount by which the estimated current fair value of the Company’s commonshares exceeds the exercise price of the warrant (known as “variable planaccounting”).  Increases or decreases inthe estimated fair value of the Company’s common stock between the grant dateand the exercise date result in corresponding increases or decreases,respectively, in compensation expense in the period in which the change in estimatedfair value of common stock occurs. Accrued compensation for an award that is subsequently forfeited orcancelled is adjusted by decreasing compensation expense in the period offorfeiture or cancellation.

 

Certain warrants issuedby the Company prior to June 30, 2006 are not subject to variable planaccounting because there is no requirement to provide any future service to theCompany in order to exercise the warrants. Therefore, the Company does not record any compensation expense relatedto these warrants.

 

**Transactionswith Related Parties**

 

In the normal course ofbusiness, the Company enters into transactions with various non-employeerelated parties for financing arrangements, legal services, financial advisoryservices and management services.  TheCompany utilizes accounting practices for these transactions that areconsistent with similar transactions with unrelated third parties.  Refer to Note 19 of the consolidatedfinancial statements for a summary of the Company’s related party transactions.

 

***Note 3.****** ******NewAccounting Pronouncements***

 

**Accounting Pronouncements Adopted During the FiscalYear Ended June 30, 2009**

 

In September 2006,the Financial Accounting Standard Board (“FASB”) issued Statement of FinancialAccounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”).  SFAS No. 157 defines fair value,establishes a framework for measuring fair value, and requires additionaldisclosures regarding fair value measurements. In addition, SFAS No. 157 requires that entities consider their owncredit risk when measuring the fair value of liabilities including, but notlimited to, liabilities related to derivative contracts.  The Company adopted the provisions of SFAS No. 157,effective July 1, 2008.  Theadoption of SFAS No. 157 did not have a material impact on the Company’sfinancial position or results of operations. ** **Refer to Note 14 for fair valuedisclosures required under SFAS No. 157.

 

In February 2008,the FASB issued Statement of Financial Accounting Standards No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”),which permits, but does not require, entities to elect fair value measurementfor both the initial and subsequent measurements of certain financial assetsand liabilities that were not previously measured at fair value, generally onan instrument-by-instrument basis. Changes in fair value subsequent to initial

 

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measurement are to berecognized in earnings during the periods when those changes occur.  SFAS No. 159 also requires additionaldisclosures to compensate for the lack of comparability that will arise fromthe election of the fair value option for those financial instruments.  The Company did not adopt the provisions ofSFAS No. 159 for any financial assets or liabilities as of the effectivedate of July 1, 2008.

 

In September 2008,the FASB ratified the consensus on Emerging Issues Task Force Issue No. 08-5,“Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-PartyCredit Enhancement” (“EITF No. 08-5”). EITF No. 08-5 requires that the measurement of liabilities withinseparable, third-party credit enhancements carried or disclosed at fair valueon a recurring basis exclude the effect of the credit enhancement.  EITF No. 08-5 also requires debtors toconsider their own credit standing, and not that of the third-party guarantor,in measuring the fair value of a liability with a third-party guarantee.  EITF No. 08-5 is effective on aprospective basis for the first reporting period on or after December 15,2008, with earlier application permitted. The Company adopted the provisions of EITF No. 08-5 effective January 1,2009.  Adoption of EITF No. 08-5 didnot have any impact on the Company’s financial position or results ofoperations.

 

In March 2008, theFASB issued Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities” (“SFAS No. 161”).  SFAS No. 161 requires companies withderivative instruments to disclose information that would enable readers offinancial statements to understand: (1) how and why a company usesderivative instruments; (2) how derivative instruments and related hedgeditems are accounted for under U.S. GAAP; and (3) how derivativeinstruments and related hedged items affect a company’s financial position,financial performance and cash flows. SFAS No. 161 must be applied prospectively for fiscal years andinterim periods beginning after November 15, 2008.  The Company adopted the provisions of SFAS No. 161effective January 1, 2009.  Refer toNote 13 for disclosures required under SFAS No. 161.

 

In April 2009, theFASB issued FASB Staff Position No. FAS 157-4, “Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly” (“FSPNo. 157-4”).  FSP No. 157-4provides additional guidance for estimating fair value in accordance with SFAS No. 157when the volume and level of activity for the asset or liability havesignificantly decreased.  It alsoprovides guidance on identifying circumstances that indicate a transaction isnot orderly.  FSP No. 157-4 iseffective for interim and annual reporting periods ending after June 15,2009.  The Company adopted the provisionsof FSP No. 157-4 effective for its fiscal quarter ending June 30,2009.  The adoption of FSP No. 157-4did not have any impact on the Company’s financial position or results ofoperations.

 

In May 2008, theFASB issued Statement of Financial Accounting Standards No. 162, “TheHierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”).  SFAS No. 162 identifies the sources ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements that are presented in conformity withU.S. GAAP.  SFAS No. 162 was adoptedby the Company effective January 1, 2009. The adoption of SFAS No. 162 did not have any impact on the Company’sfinancial position or results of operations.

 

In May 2009, FASBissued Statement of Financial Accounting Standards No. 165, “SubsequentEvents” (“SFAS No. 165”).  SFAS No. 165establishes principles and requirements for subsequent events, including: (1) theperiod after the balance sheet date during which management of a reportingentity shall evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements; (2) thecircumstances under which an entity shall recognize events or transactionsoccurring after the balance sheet date in its financial statements; and (3) thedisclosures that an entity shall make about events or transactions thatoccurred after the balance sheet date. SFAS No. 165 is effective for interim or annual financial periodsending after June 15, 2009.  TheCompany adopted the provisions of SFAS No 165 effective with its financialstatements prepared for the fiscal year ended June 30, 2009.  The adoption of SFAS No. 165 did nothave any impact on the Company’s financial position or results ofoperations.  Refer to Note 4 fordisclosures related to subsequent events.

 

**AccountingPronouncements Not Yet Adopted as of June 30, 2009**

 

In March 2008, theFASB issued Statement of Financial Accounting Standards No. 141(R), “BusinessCombinations” (“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and requirements for anacquiring company to recognize and measure in its financial statements theidentifiable assets acquired, liabilities assumed, goodwill acquired, any gainfrom a bargain purchase, and any noncontrolling interest in an acquired company.  In addition, SFAS No. 141(R) providesguidance for disclosures relating to business combinations.  SFAS No. 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  The Company intends to adopt theprovisions of SFAS No. 141(R) for acquisitions occurring on or after July 1,2009.  The Company is currentlyevaluating the provisions of SFAS No. 141(R) to determine their likelyimpact on the accounting and reporting for future acquisitions, if any.

 

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Also in March 2008,the FASB issued Statement of Financial Accounting Standards No. 160, “NoncontrollingInterests in Consolidated Financial Statements — An Amendment of ARB No. 51”(“SFAS No. 160”).  SFAS No. 160establishes accounting and reporting standards for ownership interests insubsidiaries held by parties other than the parent, for changes in a parent’sownership interest while the parent retains its controlling financial interestin a subsidiary, and for any retained noncontrolling equity investment by aparent when a subsidiary is deconsolidated. SFAS No. 160 is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2008.  The Company intends to adopt the provisionsof SFAS No. 160 for acquisitions occurring on or after July 1,2009.  The Company is currentlyevaluating the provisions of SFAS No. 160 to determine their likely impacton the accounting and reporting for future acquisitions, if any.

 

In April 2009, theFASB issued FASB Staff Position No. FAS 141(R)-1, “Accounting for AssetsAcquired and Liabilities Assumed in a Business Combination That Arise fromContingencies” (“FSP No. FAS 141(R)-1”). FSP No. FAS 141(R)-1 amends and clarifies SFAS No. 141(R) toaddress application issues relating to accounting and disclosures for assetsand liabilities arising from contingencies in a business combination.  FSP No. FAS 141(R)-1 appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  The Company intends to adopt theprovisions of FSP No. FAS 141(R)-1 for acquisitions occurring on or after July 1,2009.  The Company is currentlyevaluating the provisions of FSP No. FAS 141(R)-1 for their likely impacton the accounting and reporting for future acquisitions, if any.

 

In April 2009, theFASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “InterimDisclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB28-1”).  FSP FAS 107-1 and APB 28-1amends FASB Statement No. 107, “Disclosures about Fair Value of FinancialInstruments,” to require disclosures about financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements.  It also amends APB Opinion No. 28,“Interim Financial Reporting,” to require those disclosures in summarizedfinancial information at interim reporting periods.  FSP FAS 107-1 and APB 28-1 is effective forinterim reporting periods ending after June 15, 2009, with early adoptionpermitted for periods ending after March 15, 2009.  The Company intends to adopt the provisionsof FSP FAS 107-1 and APB 28-1 effective with its reporting period ending September 30,2009, which represents the first interim reporting period of its 2010 fiscalyear.

 

In June 2009, theFASB issued Statement of Financial Accounting Standards No. 168, “The FASBAccounting Standards CodificationTM and the Hierarchy of Generally AcceptedAccounting Principles” (“SFAS No. 168”). SFAS No. 168 identifies the sources of accounting principles andthe framework for selecting the principles used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principles in the United States.  SFAS No 168 replaces SFAS No. 162.   SFAS No. 168 is effective for financialstatements issued for interim and annual periods ending after September 15,2009.  The Company intends to adopt theprovisions of SFAS No. 168 effective July 1, 2009.  The adoption of SFAS No. 168 is notexpected to have any impact on the Company’s financial position or results ofoperations.

 

***Note 4.****** ******SubsequentEvents***

 

The Company has evaluatedsubsequent events through October 13, 2009, which is the date that theseconsolidated financial statements were issued. Other than the consummation of the Restructuring described below, therewere no material events or transactions during the period July 1, 2009through October 13, 2009 that required recognition or disclosure in theseconsolidated financial statements.

 

**Debt and Equity Restructuring**

 

A sharp drop in naturalgas market prices during the six months ended December 31, 2008 resultedin a significant reduction in the natural gas inventory component of theavailable borrowing base under the Company’s revolving credit facility with asyndicate of banks (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 governs the Revolving Credit Facility, prompted downgrades inthe Company’s credit ratings from Standard & Poor’s and Moody’s andultimately resulted in the Company seeking and obtaining material waivers ofdebt covenants and defaults and amendments to the agreement that governs theRevolving Credit Facility and the Company’s principal commodity hedge facility(the “Hedge Facility”). Such amendments had the following material directimpacts on the Company’s liquidity position:

 

·      The maturity dates of the RevolvingCredit Facility and Hedge Facility were extended to September 2009.

·      The maximum amount that could be borrowedunder the Revolving Credit Facility was reduced from $280.0 million at June 30,2008 to $115.0 million at June 30, 2009, and $94.0 million effective July 31,2009.

 

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·      The Company was required to actively seeka new facility to replace the Revolving Credit Facility and Hedge Facility.

·      Through June 30, 2009 the Companypaid approximately $8.7 million of fees related to all amendments andextensions, which were deferred on the consolidated balance sheet and are beingamortized as an increase to interest expense over the remaining terms of theRevolving Credit Facility and Hedge Facility. During fiscal year 2009, the Company recorded approximately $7.5 millionof incremental interest expense resulting from amortization of these deferredcosts.

 

The Company explored anumber of potential liquidity events, including the potential sale of itsbusiness.  Given the currently negativeconditions in the economy generally and the credit markets in particular, therewas substantial uncertainty that the Company would be able to effect arefinancing of the Revolving Credit Facility without a material restructuringof its debt and equity position.

 

On September 22,2009, the Company consummated an equity and debt restructuring (the “Restructuring”),which was intended to reduce its debt exposure and interest expense, improveits liquidity and improve its financial and operational flexibility in order toallow it to compete more effectively. The Restructuring included, among other things, the transactionsdescribed below.

 

***Amendment and Restatement of Corporate Documents***

 

On the consummation dateof the of the Restructuring, the Company’s Certificate of Incorporation andBylaws were amended and restated, and the Company entered into new stockholderagreements with holders of various classes of newly authorized commonstock.  These documents contain customaryprovisions, including provisions relating to certain approval rights,preemptive rights, share transfer restrictions, rights of first refusal,tag-along rights and drag-along rights.

 

Additionally, the amendedand restated Certificate of Incorporation authorized issuance of 200,000,000shares of Common Stock, consisting of 50,000,000 shares of Class A CommonStock, 10,000,000 shares of Class B Common Stock, 40,000,000 shares of Class CCommon Stock and 100,000,000 shares of Class D Common Stock.  Prior to the consummation of theRestructuring, the Company had 4,681,219 shares of common stock issued andoutstanding.  Those shares of commonstock were exchanged for 4,499,588 shares of newly authorized Class CCommon Stock, which represented 8.29% of the aggregate shares of common stockoutstanding as of the consummation date of the Restructuring.  Additional shares of Class A CommonStock, Class B Common Stock and Class C Common Stock were issued tovarious parties as a result of the Restructuring, as described below.

 

As a result of amendmentsand restatements to the Company’s corporate documents, effective September 22,2009, the Company’s authorized board of directors increased to nine membersfrom eight members prior to the consummation of Restructuring.  The initial composition of the new board ofdirectors (the “Board of Directors”) is described below

 

·      Holders of the Class A Common Stockare entitled to nominate and elect five directors (the “Class A Directors”),at least two of whom shall be independent and qualify as a “financial expert”.

·      The holders of Class B Common Stockis entitled to nominate and elect one director (the “Class B Director”).

·      Holders of Class C Common Stock areentitled to nominate and elect two directors (the “Class C Directors”).

·      The ninth Director is Holdings’ presidentand chief executive officer.

 

***Exchange of Floating Rate Notes due 2011 for Cash, Fixed Rate Notes due2014 and Class A Common Stock***

 

As of June 30, 2009,the Company had $165.2 million aggregate principal amount of Floating RateNotes due 2011 outstanding (the “Floating Rate Notes due 2011”).  On September 22, 2009, the Companyconsummated an exchange offer of $158.8 million aggregate principal amount ofoutstanding Floating Rate Notes due 2011 for $26.7 million of cash, $67.8million aggregate principal amount of Fixed Rate Notes due 2014 and 33,940,683shares of newly authorized Class A Common Stock.  The shares of Class A Common Stockissued to the holders of the Fixed Rate Notes due 2014 represented 62.5% of theaggregate shares of common stock outstanding as of the consummation date.  The Fixed Rate Notes due 2014 were issued ata discount, which will be recorded as a reduction from the Fixed Rate Notes due2014 on the Company’s consolidated balance sheets during the first quarter offiscal year 2009, and which will be amortized as an increase to interest expenseover the remaining life of the Fixed Rate Notes due 2014.

 

Refer to Note 16 foradditional information regarding the Floating Rate Notes due 2011 and FixedRate Notes due 2014.

 

***New Master Credit, Hedge and Supply Agreement***

 

As of June 30, 2009,the Company relied on the following credit, commodity hedging and commoditysupply arrangements

 

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for operation of itsnatural gas and electricity businesses:

 

·      TheRevolving Credit Facility was used primarily to post letters of credit requiredto effectively operate within the markets that the Company serves;

·      TheHedge Facility was used as the Company’s primary facility to economically hedgevariability in the cost of natural gas;

·      Commodityderivative arrangements with various counterparties were used to economicallyhedge variability in the cost of electricity; and

·      Arrangementswith numerous commodity suppliers to supply natural gas and electricitynecessary for customer consumption in the markets that the Company serves.

 

Effective September 22,2009 the Revolving Credit Facility and Hedge Facility were replaced by a newexclusive credit, supply and commodity hedging agreement (the “Commodity SupplyFacility”) with Sempra Energy Trading LLC (“RBS Sempra”), which effectivelyreplaced the separate credit, hedging and supply arrangements outlinedabove.  As a condition for entry into theagreements governing the Commodity Supply Facility, the Company also issued4,002,290 shares of newly authorized Class B Common Stock to RBS Sempra,which represented 7.37% of the Company’s aggregate shares of common stockoutstanding on the consummation date of the Restructuring.  The aggregate fair value of the common stockissued to RBS Sempra was recorded as deferred financing costs in other assetson the consolidated balance sheets and will be amortized over the remainingterm of the Commodity Supply Facility.

 

Refer to Note 15 foradditional information regarding the Commodity Supply Facility.

 

***Conversion of Redeemable Convertible Preferred Stock to Class CCommon Stock***

 

As of June 30, 2009,the Company had 1,451,310 shares of Preferred Stock outstanding, which wasrecorded at its estimated redemption value of $54.6 million on the consolidatedbalance sheets.  On September 22,2009, all outstanding shares of Preferred Stock were exchanged for 11,862,551shares of newly authorized Class C common stock, which represented 21.84%of the aggregate shares of the Company’s common stock outstanding afterconsummation of the Restructuring.  Theexcess of the redemption value over the aggregate fair value of common stockissued to the holders of Preferred Stock was reclassified to stockholders’equity on the consolidated balance sheets during the first quarter of fiscalyear 2010.

 

Refer to Note 17 foradditional information regarding the Company’s redeemable convertible preferredstock.

 

***Termination of the Credit Agreement with Denham Commodity Partners LP (“Denham”)***

 

As of June 30, 2009,the Company had a $12.0 million outstanding balance under a credit agreementwith Denham Commodity Partners LP (the “Denham Credit Facility”).  On September 22, 2009, all amountspreviously borrowed were repaid and the Denham Credit Facility was terminated.

 

Refer to Note 19 foradditional information regarding the Denham Credit Facility.

 

***NewManagement Incentive Plan and Bonuses***

 

In connection with theRestructuring, it is anticipated that the Company’s board of directors willauthorize the creation of a new management incentive plan (the “ManagementIncentive Plan”), pursuant to which they may issue Class C Common Stocknot to exceed 10% of the Company’s aggregate outstanding common stock (on afully diluted basis) after giving effect to the Restructuring.  The Company expects that the ManagementIncentive Plan will provide the board of directors the flexibility to makeawards to employees, officers, directors, consultants and advisors and willpermit, among other things, the grant of options to purchase shares of commonstock that are intended to qualify as incentive stock options under Section 422of the Internal Revenue Code, grants of options to purchase shares of commonstock that will not so qualify, grants of stock appreciation rights, and grantsof common stock at incentive prices or for free.

 

In addition, thecompensation committee of the board of directors approved a total bonus poolequal to $750,000, which was paid to 19 of the Company’s executive officers andemployees, including the Company’s chief executive officer and chief financialofficer, upon the consummation of the Restructuring.

 

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***Settlementand Cancellation of Existing Options and Warrants***

 

As of June 30, 2008,the Company had options and warrants outstanding which were, 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).  Pursuant to 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. As a result, all outstanding options and warrants were cancelled andterminated.  The total amount requiredfor such cash settlement payments was approximately $0.2 million, which wasrecorded as general and administrative expense during the first quarter offiscal year 2010.

 

***Note 5****** ******Seasonalityof Operations***

 

For the fiscal year endedJune 30, 2009, natural gas and electricity sales accounted forapproximately 85% and 15%, respectively, of the Company’s total sales.  Weather conditions have a significant impacton customer demand for natural gas and electricity consumption.  In addition, weather can have an impact onthe price of natural gas and electricity. Customer demand exposes the Company to a high degree of seasonality insales, cost of sales, billing and collection of customer accounts receivable,inventory requirements and cash flows. In addition, budget billing programs and LDC payment terms can causetiming differences between the billing and collection of accounts receivableand the recording of revenues.

 

The Company utilizes aconsiderable amount of cash from operations to meet working capitalrequirements during the months of November through April of eachfiscal year.  In addition, the Companyutilizes cash to purchase natural gas inventories during the months of April throughOctober.  The majority of natural gascustomer consumption and gross profit occurs during the months of November throughMarch with collections on accounts receivable peaking in the spring.  By contrast, electricity customer consumptionand gross profit peaks during the summer months of June through September withcollections on accounts receivable peaking in late summer and early fall.

 

The impact of rapidlyrising or falling commodity prices also varies greatly depending on the period oftime in which they occur during the Company’s fiscal year.  Although commodity price movements can havematerial short-term impacts on monthly and quarterly operating results,operating results for a full fiscal year may not be materially impacted by suchtrends due to the Company’s economic hedging and contract pricingstrategies,.  Therefore, the short-termimpacts of changing commodity prices should be considered in the context of theCompany’s entire annual operating cycle.

 

***Note 6.****** ******AccountsReceivable, Net***

 

Accounts receivable, netis summarized in the following table.

 
| ** **                                                | ** ** | **Balances at June 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| ** **                                                | ** ** | **(in thousands)**            | ** ** |
| Billed  customer accounts receivable:                     | ** ** | ** **                    |       |   |   |
| Guaranteed  by LDCs                                       | ** ** | **$**                         | **7,768**  |   | $ | 17,085 |   |
| Non-guaranteed  by LDCs                                   | ** ** | **26,679**                    |       | 32,966 |   |
|                                                      | ** ** | **34,447**                    |       | 50,051 |   |
| Unbilled  customer accounts receivable (1):               | ** ** | ** **                    |       |   |   |
| Guaranteed  by LDCs                                       | ** ** | **5,737**                     |       | 9,803 |   |
| Non-guaranteed  by LDCs                                   | ** ** | **10,547**                    |       | 19,905 |   |
|                                                      | ** ** | **16,284**                    |       | 29,708 |   |
| Total  customer accounts receivable                       | ** ** | **50,731**                    |       | 79,759 |   |
| Less:  Allowance for doubtful accounts                    | ** ** | **(7,344**                    | **)**      | (5,154 | ) |
| Customer  accounts receivable, net                        | ** ** | **43,387**                    |       | 74,605 |   |
| Cash  imbalance settlements and other receivables, net(2) | ** ** | **4,211**                     |       | 13,068 |   |
| Accounts  receivable, net                                 | ** ** | **$**                         | **47,598** |   | $ | 87,673 |   |

 

----

| (1)    |   | Unbilled customer  accounts receivable represents estimated revenues associated with natural gas  and electricity consumed by customers but not yet billed under the LDC’s  monthly cycle billing method.                                                                                                        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                  |
| (2)    |   | Cash imbalance  settlements represent differences between natural gas delivered to LDCs for  consumption by the Company’s customers and actual customer usage. Such  imbalances are expected to be settled in cash within the next 12 months in  accordance with contractual payment arrangements with the LDCs. |

 

The Company operates in39 market areas located in 14 U.S. states and two Canadian provinces.  The Company’s diversified geographic coveragemitigates the credit exposure which could result from concentrations in asingle LDC territory or a single regulatory jurisdiction, from extreme localweather patterns or from an economic downturn in any single geographic

 

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region.  In addition, the Company has limited exposureto risk associated with high concentrations of sales volumes with individualcustomers.  The Company’s largestcustomer accounted for approximately 2% of natural gas sales during each of thefiscal years ended June 30, 2009, 2008 and 2007.

 

The allowance for doubtfulaccounts represents the Company’s estimate of potential credit lossesassociated with customer accounts receivable in markets where such receivablesare not guaranteed by LDCs.  The Companyassesses the adequacy of its allowance for doubtful accounts through review ofthe aging of customer accounts receivable and general economic conditions inthe markets that it serves.  Based uponthis review as of June 30, 2009, and for the fiscal year then ended, theCompany believes that its allowance for doubtful accounts is adequate to coverpotential credit losses related to customer accounts receivable.  An analysis of the allowance for doubtfulaccounts is provided in the following table.

 
| ** **                                                                                                          | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2009**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                                          | ** ** | **(in thousands)**                            | ** ** |
|                                                                                                                |       |                                               |       |   |   |   |   |
| Balance  at beginning of period                                                                                     | ** ** | **$**                                              | **5,154**  |   | $ | 5,259 |   | $ | 3,285 |   |
| Add:  Provision for doubtful accounts                                                                               | ** ** | **12,009**                                         |       | 5,050 |   | 3,018 |   |
| Less:  Net charge offs of customer accounts receivable                                                              | ** ** | **(9,819**                                         | **)**      | (5,155 | ) | (1,044 | ) |
| Balance  at end of period                                                                                           | ** ** | **$**                                              | **7,344**  |   | $ | 5,154 |   | $ | 5,259 |   |
|                                                                                                                | ** ** | ** **                                         |       |   |   |   |   |
| Provision  for doubtful accounts as a percentage of sales of natural gas and electricity  in non-guaranteed markets | ** ** | **2.79**                                           | **%**      | 1.19 | % | 0.82 | % |

 

Reserves and discounts inthe consolidated statements of operations includes the provision for doubtfulaccounts related to customer accounts receivable within markets where suchreceivables are not guaranteed by LDCs as well as discounts related to customeraccounts receivable that are guaranteed by LDCs.  For the fiscal year ended June 30, 2009,approximately 55% of the Company’s total sales of natural gas and electricitywere within markets where LDCs do not guarantee customer accounts receivablewhile 45% of total sales were within markets where LDCs guarantee customeraccounts receivable at a weighted average discount rate of approximately1%.  Such discount is the cost toguarantee the customer accounts receivable. In cases where customer accounts receivable are guaranteed by the LDC,the Company is exposed to the credit risk of the LDC, rather than that of itscustomers.  The Company monitors thecredit ratings of LDCs and the parent companies of LDCs that guarantee customeraccounts receivable.  The Company alsoperiodically reviews payment history and financial information for LDCs toensure that it identifies and responds to any deteriorating trends.  As of June 30, 2009, all of the Company’scustomer accounts receivable in LDC-guaranteed markets were with LDCs withinvestment grade credit ratings.

 

The higher provision fordoubtful accounts for fiscal year 2009, as compared with the prior fiscal year,primarily relates to the Company’s largest non-guaranteed natural gas market inGeorgia and its non-guaranteed electricity market in Texas.  Total sales of natural gas and electricityfor these markets increased a combined 7% during the fiscal year 2009.  In addition, the Company experienceddeterioration of the aging of billed customer accounts receivable within theseand other markets during fiscal year 2009. As expected, charge offs of customer accounts receivable related to thecustomer accounts acquired in the Company’s acquisition of Catalyst NaturalGas, LLC were also experienced during the final six months of fiscal year2009.  The Company will continue toclosely monitor economic conditions and actual collections data within theseand other markets for signs of any negative long-term trends which could resultin higher allowance requirements.

 

***Note 7.****** ******NaturalGas Inventories***

 

Natural gas inventoriesare summarized in the following table.

 
| ** **                                   | ** ** | **Balances at June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **(in thousands)**            | ** ** |
| ** **                                   | ** ** | ** **                    | ** ** |
| Storage  inventory for delivery to customers | ** ** | **$**                         | **24,457** | ** ** | **$** | 52,807 | ** ** |
| Imbalance  settlements in-kind (1)           | ** ** | **4,958**                     |       | 12,195 |   |
| Other                                        | ** ** | **—**                    |       | 4 |   |
| Total                                        | ** ** | **$**                         | **29,415** |   | $ | 65,006 |   |

 

----

| (1) |   | Represents inventory to  be transferred to the Company or its customers from LDCs as a result of an  excess of natural gas deliveries over amounts used by customers in prior  periods. These inventories are expected to be transferred to the Company or  its customers within the upcoming twelve-month period. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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After reaching recordhighs during the three months ended June 30, 2008, natural gas marketprices dropped sharply during fiscal year 2009, which resulted in a 60%decrease in the Company’s weighted-average average cost per MMBtu of naturalgas included in natural gas storage inventory from June 30, 2008 to June 30,2009.  The resulting decrease in naturalgas inventories was partially offset by a 14% increase in MMBtus held instorage over the same period.

 

Adjustments to the valueof natural gas inventories on the consolidated balance sheets result incorresponding adjustments to cost of goods sold on the consolidated statementsof operations.  Such adjustments resultfrom changes in inventory storage levels as natural gas is delivered tocustomers as well as changes in the weighted average cost of natural gas instorage.

 

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

 

All of the Company’sgoodwill, which resulted from its acquisition of Shell Energy Services CompanyL.L.C. (“SESCo”) in August 2006, is assigned to the natural gas businesssegment.  The Company completed itsannual impairment test of goodwill as of June 30, 2009.  At the testing date, the Company determinedthat the fair value of the natural gas reporting unit exceeded its carryingvalue.  As a result, no impairment losswas required to be recognized.  Since thetesting date, there were no material events, transactions or changes incircumstances which warranted consideration for their impact on the recordedcarrying value assigned to goodwill.

 

***Note 9.****** ******CustomerAcquisition Costs, Net***

 

Customer acquisitioncosts and related accumulated amortization are summarized in the followingtables.

 
| ** **                          | ** ** | **Balance at June 30, 2009** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **Gross********Book Value**                 | ** ** | **Accumulated  Amortization** | ** ** | **Net Book Value** | ** ** |
| ** **                          | ** ** | **(in thousands)**                          | ** ** |
| ** **                          | ** ** | ** **                                       | ** ** |
| Customer  contracts acquired        | ** ** | **$**                                            | **48,832** | ** ** | **$** | **42,553** | ** ** | **$** | **6,279** | ** ** |
| Direct  sales and advertising costs | ** ** | **40,744**                                       | ** ** | **19,073** | ** ** | **21,671** | ** ** |
| Total  customer acquisition costs   | ** ** | **$**                                            | **89,576** | ** ** | **$** | **61,626** | ** ** | **$** | **27,950** | ** ** |

 
| ** **                          | ** ** | **Balance at June 30, 2008** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **Gross********Book Value**                 | ** ** | **Accumulated  Amortization** | ** ** | **Net Book Value** | ** ** |
| ** **                          | ** ** | **(in thousands)**                          | ** ** |
| ** **                          | ** ** | ** **                                       | ** ** |
| Customer  contracts acquired        | ** ** | **$**                                            | **47,515** | ** ** | **$** | **26,395** | ** ** | **$** | **21,120** | ** ** |
| Direct  sales and advertising costs | ** ** | **32,287**                                       | ** ** | **11,714** | ** ** | **20,573** | ** ** |
| Total  customer acquisition costs   | ** ** | **$**                                            | **79,802** | ** ** | **$** | **38,109** | ** ** | **$** | **41,693** | ** ** |

 

Amortization expenserelating to capitalized customer acquisition costs was approximately $29.8million, $23.4 million and $19.5 million for the fiscal years ended June 30,2009, 2008 and 2007, respectively. Amortization expense associated with customer acquisition costscapitalized as of June 30, 2009 is expected to approximate $16.7 million,$9.3 million and $1.9 million for the fiscal years ending June 30, 2010,2011 and 2012, respectively.

 

The value andrecoverability of customer acquisition costs are evaluated quarterly bycomparing their carrying value to their projected future cash flows on anundiscounted basis.  During the fiscalyear ended June 30, 2009, no impairment was indicated as a result of thesecomparisons, and there were no material events or transactions which warrantedconsideration for their impact on the recorded book value assigned to customeracquisition costs.

 

As of June 30, 2009,the weighted-average remaining amortization period for customer acquisitioncosts is approximately 1.47 years.

 

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***Note 10.****** ******FixedAssets, Net***

 

Fixed assets, net aresummarized in the following table.

 
| ** **                                       | ** ** | ** **                             | ** ** | ** ** | ** ** | **Estimated** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|------------|------------|---------------|------------|
| ** **                                       | ** ** | **Balance at June 30,** | ** ** | **Useful** | ** ** |
| **Fixed Asset Category**                         | ** ** | **2009**                               | ** ** | **2008**   | ** ** | **Lives**     | ** ** |
| ** **                                       | ** ** | **(in thousands)**                | ** ** | ** ** | ** ** |
|                                             |       | ** **                             |       |
| Computer  equipment                              | ** ** | **$**                                  | **6,080**  |       | $          | 5,126         |       | 3 years |   |
| Computer  software and development               | ** ** | **25,607**                             |       | 25,583     |       | 3-5 years     |       |
| Office  furniture and equipment                  | ** ** | **1,502**                              |       | 1,479      |       | 3-5 years     |       |
| ** **                                       | ** ** | **33,189**                             |       | 32,188     |       |          |       |
| Less:  accumulated depreciation and amortization | ** ** | **(29,461**                            | **)**      | (21,663    | )          |          |       |
| Net                                              | ** ** | **$**                                  | **3,728**  |       | $          | 10,525        |       |   |   |

 

During each of the fiscalyears ended June 30, 2009 and 2008, the Company capitalized approximately$1.0 million of software development costs related to a project designed toreduce the number of software systems utilized to service customer accounts andto enhance the overall capabilities of existing software.  Amortization expense relating to capitalizedcomputer software costs was approximately $6.4 million, $7.7 million and $6.4million for the fiscal years ended June 30, 2009, 2008 and 2007,respectively.

 

Depreciation expenserelating to computer equipment, office furniture and other equipment wasapproximately $1.4 million, $1.6 million and $1.7 million for the fiscal yearsended June 30, 2009, 2008 and 2007, respectively.

 

***Note 11.****** ******IncomeTaxes***

 

Income tax benefit(expense) is summarized in the following table:

 
| ** **                          | ** ** | **Fiscal Years ended June 30** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                          | ** ** | **(in thousands)**                            | ** ** |
| Current:                            |       |                                               |       |   |   |   |   |
| Federal                             | ** ** | **$**                                              | **4,666**  |   | $ | 599 |   | $ | (4,750 | ) |
| State                               | ** ** | **(823**                                           | **)**      | 434 |   | (1,204 | ) |
| ** **                          | ** ** | **3,843**                                          |       | 1,033 |   | (5,954 | ) |
| Deferred:                           |       |                                               |       |   |   |   |   |
| Federal                             | ** ** | **18,892**                                         |       | (15,000 | ) | 13,249 |   |
| State                               | ** ** | **4,514**                                          |       | (3,188 | ) | 1,200 |   |
| ** **                          | ** ** | **23,406**                                         |       | (18,188 | ) | 14,449 |   |
| Total  income tax benefit (expense) | ** ** | **$**                                              | **27,249** |   | $ | (17,155 | ) | $ | 8,495 |   |

 

As of June 30, 2009,the Company has net operating loss carryforwards of approximately $2.0 millionand $0.7 million related to its U.S. and Canadian operations,respectively.  The net operating losscarryforwards related to U.S. operations will expire in fiscal year 2029.  The net operating loss carryforwards relatedto Canadian operations will expire during fiscal years 2014 through 2029.

 

The provision for incometaxes varied from income taxes computed at the statutory U.S. federal incometax rate as a result of the following:

 
| ** **                                                             | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                   |       |       |       |       |       |       |       |
| Federal  statutory rate                                                | ** ** | **35.0**   | **%**      | 35.0       | %          | 35.0       | %          |
| State  statutory rate, net of federal benefit                          | ** ** | **3.9**    |       | 4.5        |       | 5.4        |       |
| Total  statutory rate                                                  | ** ** | **38.9**   |       | 39.5       |       | 40.4       |       |
| Impact  of prior year adjustments on current and deferred income taxes | ** ** | **—** | ** ** | (0.6       | )          | **—** |       |
| Impact  of changing tax rates on prior year deferred balances          | ** ** | **—** |       | 1.0        |       | (0.1       | )          |
| Impact  of permanent differences                                       | ** ** | **(0.2**   | **)**      | 1.0        |       | (2.2       | )          |
| Impact  of recording valuation allowance                               | ** ** | **(17.3**  | **)**      | **—** |       | **—** |       |
| Effective  tax rate                                                    | ** ** | **21.4**   | **%**      | 40.9       | %          | 38.1       | %          |

 

The effective tax rateapplied to income tax benefits for fiscal years 2009 and 2007 and income taxexpense for fiscal year 2008.  The lowereffective tax rate for fiscal year 2009 was primarily due to recognition of avaluation allowance for deferred income tax assets at June 30, 2009.  The state statutory tax rate decreased to3.9% for the fiscal year ended June 30, 2009 as a result of incomeapportionment for the states in which the Company does business.

 

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Major taxingjurisdictions for the Company and tax years for each that remain subject toexamination are as follows:

 
| **Taxing Jurisdiction** | ** ** | **Open Years** | ** ** |
|------------------------------|------------|---------------------|------------|
|                         |       |                |       |
| U.S.  Federal                |       | 2005 and later      |       |
| U.S.  states and cities      |       | 2005 and later      |       |
| Canada                       |       | 2005 and later      |       |

 

The significantcomponents of the Company’s deferred tax assets and liabilities are summarizedin the following table.

 
| ** **                                             | ** ** | **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 |   |

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamount of assets and liabilities for financial reporting purposes and theamounts 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, 2009, the Company determinedthat it was “more likely than not” that a portion of its deferred tax assetswould not be realized.

 

The Company has deferredtax assets related to unrealized losses from risk management activities.  The Company anticipates that these deferredtax assets will be realized in future periods when sales of fixed pricecommodities, to which the unrealized losses from risk management activitiesrelate, occur.  Therefore, the Companydid not establish a valuation allowance for these deferred tax assets.

 

For the remainingdeferred tax assets reflected in the table above, the Company determined basedon available evidence, including historical financial results for the lastthree years, that it is “more likely than not” that a portion of these itemsmay not be recoverable in the future. Accordingly, the Company recorded valuation allowances of approximately$22.0 million and $0.7 million related to its U.S. and Canadian operations,respectively, as a reduction of tax benefit recorded for fiscal year 2009.

 

Activity related touncertain tax positions for the fiscal year ended June 30, 2009 issummarized in the following table.

 
| ** **                                      | ** ** | **Amount**             | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **(in millions)** | ** ** |
|                                            |       |                   |       |
| Unrecognized  tax benefit at July 1, 2008  |       | $                      | 0.9        |   |
| Decreases  from payments during the fiscal year |       | —                 |       |
| Unrecognized  tax benefit at June 30, 2009 |       | $                      | 0.9        |   |

 

At June 30, 2009,the Company had an uncertain tax position of $0.9 million for a timing issuerelated to compensation expense.  Therewas no change to this amount during the fiscal year ended June 30, 2009,and the Company does not expect this item to be settled within the next twelvemonths.  There is no change in the effectivetax rate as a result of this item.

 

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The Company recognizes accrued interest and penaltiesrelated to income tax liabilities in accrued liabilities in the consolidatedbalance sheet and interest expense in the consolidated statement ofoperations.  As of June 30, 2009,the Company had accrued approximately $0.2 million for potential interest andpenalties for the compensation-related timing issue described above.  There was no material change in this amountduring the fiscal year ended June 30, 2009.

 

***Note 12.***  ***Accounts Payable and AccruedLiabilities***

 

Accounts payable andaccrued liabilities are summarized in the following table.

 
| ** **                                            | ** ** | **Balance at June 30,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                | ** ** |
| ** **                                            | ** ** | ** **                             | ** ** |
| Interest  payable (1)                                 | ** ** | **$**                                  | **8,946**  |   | $ | 11,662 |   |
| Trade  accounts payable and accrued liabilities (2)   | ** ** | **13,952**                             |       | 14,427 |   |
| Accrued  payroll and related liabilities              | ** ** | **4,761**                              |       | 3,824 |   |
| Sales  and other taxes                                | ** ** | **2,193**                              |       | 1,291 |   |
| Customer  contracts acquired in business combinations | ** ** | **47**                                 |       | 699 |   |
| Other                                                 | ** ** | **3,401**                              |       | 4,699 |   |
| Total  accounts payable and accrued liabilities       | ** ** | **$**                                  | **33,300** |   | $ | 36,602 |   |

 

----

| (1) |   | Includes $1.0  million of accrued interest at June 30, 2009 related to bridge loans  from Charter Mx LLC, Denham and certain members of the Company’s senior  management team. Refer to Note 19 for additional information regarding  related party transactions. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Includes $1.9  million and $0.3 million due to related parties at June 30, 2009 and  2008, respectively, for legal services, financial advisory services and  management fees. Refer to Note 19 for additional information regarding  related party transactions.      |

 

Interest payable relatesprimarily to accrued interest on the Floating Rate Notes due 2011.  Trade accounts payable and accrued expensesrelate primarily to transportation and distribution charges, imbalances andother utility-related expenses.

 

***Note 13.****** ******Derivativesand Hedging Activities***

 

The Company is exposed tocertain risks relating to its ongoing business operations.  The primary risks managed by using derivativeinstruments are commodity price risk and interest rate risk.  The Company has a risk management policy thatis intended to reduce its financial exposure related to changes in the price ofnatural gas and electricity and to changes in the interest rate associated withits Floating Rate Notes due 2011.  TheCompany’s risk management policy defines various risk management controls andlimits designed to monitor the Company’s commodity price risk position andensure that hedging performance is in line with objectives established by itsBoard of Directors and management. Speculative trading activities are explicitly prohibited under theCompany’s risk management policy.

 

The Company has electednot to designate any of the derivative instruments as accounting hedges underU.S. GAAP.  Accordingly, all changes inthe fair value of outstanding commodity derivative contracts are adjusted directlythrough unrealized gains or losses from risk management activities, net on theconsolidated statements of operations, while changes in the fair value ofoutstanding interest rate derivative contracts are adjusted directly throughinterest expense, net.  Unrealized gainsand losses on the consolidated balance sheets reflect the current market valuesfor all of the Company’s derivative instruments.

 

Outstanding derivativeinstruments, which extend through December 2011, are summarized in thefollowing table.

 
| ** **                                             | ** ** | **Open Contracts********As of********June 30, 2009** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Natural gas (primarily under the Hedge  Facility):** | ** ** | ** **                                                | ** ** |
| NYMEX  referenced over the counter swaps (MMBtus(1))   | ** ** | **10,158,000**                                            | ** ** |
| Basis  swaps (MMBtus)                                  | ** ** | **11,712,000**                                            | ** ** |
| Options  (MMBtus)                                      | ** ** | **1,015,000**                                             | ** ** |
|                                                   | ** ** | ** **                                                | ** ** |
| **Electricity:**                                       | ** ** | ** **                                                | ** ** |
| Swaps  and fixed price contracts (MWhrs) (2)           | ** ** | **168,000**                                               | ** ** |

 

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(1)  MillionBritish thermal units

(2)  Millionwatt hours

 

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The fair values ofderivative instruments recorded on the Company’s consolidated balance sheetsare summarized in the following table.

 
| ** **                 | ** ** | ** **                                        | ** ** | **Fair Value as of June 30, 2009** | ** ** |
|----------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| **Type of Derivative**     | ** ** | **Location on the Consolidated Balance Sheet**    | ** ** | **Prior to  Netting**                             | ** ** | **Impact of  Master  Netting  Agreements** | ** ** | **After Netting** | ** ** |
| ** **                 | ** ** | ** **                                        | ** ** | **(in thousands)**                           | ** ** |
|                       |       |                                              |       | ** **                                        |       |
| **Asset derivatives:**     |       |                                              |       |                                              |       |   |   |   |   |
| Commodity  derivatives     |       | Unrealized gains from  risk management activities | ** ** | **$**                                             | **24,649** | ** ** | **(24,355** | **)** | **294** |   |
| Interest  rate derivatives |       | Unrealized gains from  risk management activities | ** ** | **—**                                        | ** ** | **—** | ** ** | **—** | ** ** |
| Total                      | ** ** | ** **                                        | ** ** | **$**                                             | **24,649** |   | **$** | **(24,355** | **)** | **$** | **294** |   |
|                       | ** ** | ** **                                        | ** ** | ** **                                        |       | ** ** | ** ** | ** ** |   |
| **Liability Derivatives:** |       |                                              |       |                                              |       |   |   |   |   |
| Commodity  derivatives     |       | Unrealized gains from  risk management activities | ** ** | **$**                                             | **64,347** | ** ** | **(24,355** | **)** | **$** | **39,992** |   |
| Interest  rate derivatives |       | Unrealized gains from  risk management activities | ** ** | **8,303**                                         | ** ** | **—** | ** ** | **8,303** | ** ** |
| Total                      | ** ** |                                              | ** ** | **$**                                             | **72,650** |   | **$** | **(24,355** | **)** | **$** | **48,295** |   |

 

The effect of derivativeinstruments on the Company’s consolidated statements of operations for thefiscal year ended June 30, 2009 is summarized in the following table.

 
| ** **                                | ** ** | **Location of (Gains) Losses Recognized on the********Consolidated Statement of Operations** | ** ** | **Amount of  (Gains)  Losses  Recognized** | ** **  |
|-------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                | ** ** | ** **                                                                                   | ** ** | **(in thousands)**                         | ** **  |
| **Fiscal year ended June 30, 2009:** |       |                                                                                         |       |                                       |        |
| Commodity  derivatives                    |       | Cost of goods sold –  realized losses (gains) from risk management activities, net      | ** ** | **$**                                      | **72,824**  | ** ** |
| Commodity  derivatives                    |       | Cost of goods sold –  unrealized losses (gains) from risk management activities, net    | ** ** | **87,575**                                 | ** **  |
| Interest  rate derivatives                |       | Interest expense, net  of interest income                                                    | ** ** | **3,693**                                  | ** **  |
| Total                                     | ** ** |                                                                                         |       | **$**                                      | **164,092** |   |

 

**Commodity Price Risk ManagementActivities**

 

The Company utilizes swapinstruments and, to a lesser extent, option instruments to economically hedgethe anticipated natural gas and electricity commodity purchases required tomeet expected customer demand for all accounts served under fixed pricecontracts (up to 110% in the winter months with respect to customer demand incertain natural gas utility service areas with daily balancing requirements andup to 110% in the summer months with respect to customer demand in certainelectricity utility service areas).

 

***NaturalGas Hedging Activities***

 

Although the Companyengages in economic hedging activities with various counterparties forelectricity, it utilizes one particular hedge facility to economically hedgethe variability in the cost of natural gas. The Hedge Facility, which was governed by a master transaction agreement(the “Master Transaction Agreement”), had an initial term of two years withsubsequent one-year renewal terms.

 

The Hedge Facility wasreplaced by the Commodity Supply Facility effective September 22, 2009(refer to Note 15).

 

Under the Hedge Facility,the Company utilized NYMEX referenced over-the-counter swaps, basis swaps andoptions to hedge the risk of variability in the cost of natural gas.  Until the termination date of the HedgeFacility, the Company had the ability to enter into NYMEX and basis swapsthrough June 2010. Fees under the Hedge Facility include an annualmanagement fee, a volumetric fee based on the tenor of the swap and other feeswhich allow the hedge provider to mitigate the potential risks arising frommaterial declines of natural gas market prices based on the Company’s overallhedge position with the provider.

 

During fiscal year 2009,the Master Transaction Agreement was amended several times to conform toprovisions of various amendments to the Revolving Credit Facility, includingthose relating to milestone events and dates associated with a Liquidity Event.

 

Other material amendmentsto the Hedge Facility during fiscal year 2009 included:

 

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·      Thematurity date of the Hedge Facility was extended to September 21, 2009from December 19, 2008.

·      EffectiveMay 29, 2009, counterparties for any new natural gas transactions requiredthe approval of the hedge provider at its sole discretion.

·      EffectiveMay 29, 2009, the limitation on the maximum total outstanding hedgingpositions was reduced from a maximum of 25.0 million MMBtus in the originalagreement that governs the Hedge Facility to 12.0 million MMBtus effective May 29,2009, to 11.0 million MMBtus effective July 31, 2009, and to 10.0 millionMMBtus effective August 31, 2009.

 

The Hedge Facility wassecured by a first lien on customer contracts and a second lien onsubstantially all other assets of the Company, primarily unrestricted cash,customer accounts receivable and natural gas inventory.  Collateral available to satisfy the secondlien represents the sum of: (1) the excess of calculated net asset valuesover calculated availability under the Revolving Credit Facility; plus (2) thecarrying value of customer acquisition costs.  At June 30, 2009, total collateral available to satisfy natural gasderivative liabilities was approximately $43.7 million, which exceeded suchliabilities by approximately $7.8 million.

 

As of June 30, 2008,the Company was required to post a $25.0 million letter of credit as collateralfor any potential negative mark-to-market changes in the value of its forwardhedge position.  As a result of theamendment to the Master Transaction Agreement that was finalized in July 2008,the Company was required to increase the collateral required to be posted asmargin to $35.0 million in the event that the negative mark-to-market value ofits forward hedge position exceeds $25.0 million.  The Company has the flexibility to posteither cash collateral or issue a letter of credit as margin for the HedgeFacility.  As of June 30, 2009, theCompany had increased the letter of credit posted as collateral to $35.0million because its mark-to-market exposure under the Hedge Facility exceeded$25.0 million.

 

As of June 30, 2009,all of the Company’s natural gas economic hedge positions were with acounterparty that has an investment grade credit rating.

 

***Electricity Hedging Activities***

 

The Company utilizesswaps and fixed price contracts with various counterparties to economicallyhedge the variability in the cost of electricity.  As of June 30, 2009, the Company did nothave an exclusive agreement with any single hedge provider forelectricity.  The Company manages itsexposure to risk associated with any single electricity hedge provider througha formal credit risk management process and through daily review of exposuresfrom open positions.  As of June 30,2009, all of the Company’s electricity hedge positions were with counterpartieswith investment grade credit ratings.

 

The Company is generallyrequired to post letters of credit to cover its liability positions withvarious counterparties in accordance with electricity hedging agreements.  Such counterparties periodically review theirexposure with us and adjust the required amounts of letters of credit asnecessary.

 

The Commodity SupplyFacility requires the Company to novate or unwind certain electricity swapssubsequent to closing of the Commodity Supply Facility, with RBS Sempraproviding any necessary credit support to liquidate those positions.

 

**InterestRate Risk Management Activities**

 

Effective August 4,2006, the Company became exposed to fluctuations in interest rates under theFloating Rate Notes due 2011.  As of June 30,2009, $165.2 million aggregate principal of the Floating Rate Notes due 2011was outstanding, before original issue discount.  We entered into interest rate swap agreementsduring fiscal 2007, which are utilized to manage our exposure to interest ratefluctuations on the Floating Rate Notes due 2011.  These agreements effectively convert interestrate exposure from a variable rate to a fixed rate of interest.  As of June 30, 2009, the followinginterest rate swaps were outstanding:

 

·      A$30.0 million swap that expires on August 2, 2010 and bears interest at10.33% per annum; and

·      An$80.0 million swap that expires on August 1, 2011 that bears interest at13.24% per annum.

 

The $30.0 million swapthat was due to expire on August 2, 2010 was terminated in September 2009.  A $50.0 million swap expired on August 1,2008 and was not replaced.

 

All swaps arefixed-for-floating and settle against the six-month LIBOR rate.  None of the interest rate swaps have beendesignated as a hedge and, accordingly, changes in the market value of theinterest rate swaps are charged directly to interest expense.  The additional interest expense associatedwith changes in the market value of interest rate swaps was $3.7 million, $3.3million and $0.9 million for the fiscal years ended June 30, 2009, 2008and 2007, respectively.

 

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As of June 30, 2009,the Company was not specifically required to provide any collateral or lettersof credit in support of its interest rate derivative liabilities.  However, coverage for interest ratederivative liabilities is included in the calculation of borrowing availabilityunder the Revolving Credit Facility.

 

The Commodity SupplyFacility requires the Company to novate or unwind the remaining $80.0 millionswap subsequent to closing of the Commodity Supply Facility, with RBS Sempraproviding any necessary credit support to liquidate that position.

 

**CreditRisk Associated with Derivative Financial Instruments**

 

The Company is exposed tocredit risk associated with its economic hedging program and derivative financialinstruments.  Credit risk relates to theloss resulting from the nonperformance of a contractual obligation by aderivative counterparty.  Historically,the Company has executed its fixed price derivative positions to include amaster netting agreement that mitigates the outstanding credit exposure.  Under the Hedge Facility, the Company’s riskmanagement activities are with a financial institution that has an investmentgrade credit rating.  To the extent thatfinancial hedges or physical commodities are acquired from othercounterparties, the Company’s risk management policy sets forth guidelines formonitoring, managing and mitigating credit risk exposures.  The risk management policy also establishescredit limits and requires ongoing financial reviews of counterparties.

 

***Note 14.  Fair Value of Financial Instruments***

 

As described in Note 3 ofthese consolidated financial statements, in September 2006, the FASBissued SFAS No. 157, which defines fair value for financial assets andliabilities, establishes a framework for measuring fair value, and requiresadditional disclosures regarding fair value measurements.  SFAS No. 157 established a fair valuehierarchy that prioritizes the assumptions, or “inputs,” used in applyingvaluation techniques.  The three levelsof inputs within fair value hierarchy include:

 

·      **Level 1 –**Observable inputs that reflect unadjusted quoted prices for identical assetsand liabilities in active markets as of the reporting date.

·      **Level 2 –**Inputs other than quoted prices included in Level 1 that represent observablemarket-based inputs, such as quoted market prices for similar assets****or liabilities in active markets.   Level 2 also includes unobservable inputsthat are corroborated by market data.

·      **Level 3** –Inputs that are not observable from objective sources and therefore cannot becorroborated by market data.

 

The Company generallyutilizes a market approach, as defined in SFAS No. 157, for its recurringfair value measurements.  In forming itsfair value estimates, the Company utilizes the most observable inputs availablefor the respective valuation technique. If a fair value measurement reflects inputs from different levels withinthe fair value hierarchy, the measurement is classified based on the lowestlevel of input that is significant to the fair value measurement.

 

The fair value of theCompany’s financial assets and liabilities that are measured at fair value, bylevel within the fair value hierarchy, is summarized in the following table.

 
| ** **                | ** ** | **Balance at  June 30, 2009** | ** ** |
|---------------------------|------------|------------------------------------|------------|
| ** **                | ** ** | **Level 1**                        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| ** **                | ** ** | **(in thousands)**                 | ** ** |
| **Assets:**               |       |                               |       |   |   |   |   |   |   |
| Commodity derivatives     |       | $                                  | —     |   | $ | 294 |   | $ | — |   | $ | 294 |   |
| Interest rate derivatives |       | —                             |       | — |   | — |   | — |   |
| Total                     |       | $                                  | —     |   | $ | 294 |   | $ | — |   | $ | 294 |   |
|                      |       |                               |       |   |   |   |   |   |   |
| **Liabilities:**          |       |                               |       |   |   |   |   |   |   |
| Commodity derivatives     |       | $                                  | —     |   | $ | 39,992 |   | $ | — |   | $ | 39,992 |   |
| Interest rate derivatives |       | —                             |       | 8,303 |   | — |   | 8,303 |   |
| Total                     |       | $                                  | —     |   | $ | 48,295 |   | $ | — |   | $ | 48,295 |   |

 

The Company has electednot to record the Floating Rate Notes due 2011 at fair value.  Utilizing observable market data, the fairmarket value of the Floating Rate Notes due 2011 was approximately $65.0million as of June 30, 2009.

 

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***Note 15.  Revolving Credit Facility and CommoditySupply Facility***

 

As of June 30, 2009,and through September 21, 2009, MXenergy Inc. and MXenergyElectric Inc. were borrowers under a revolving credit facility with asyndicate of banks (the “Revolving Credit Facility”).  The maximum amount that could be borrowedunder the Revolving Credit Facility was the lesser of: (1) total bankcommitments under the Revolving Credit Facility; and (2) the amount of theapplicable borrowing base, which represents the aggregate of specific advancerates against cash, customer accounts receivable, natural gas inventory andimbalance receivables. As of June 30, 2008, prior to the fiscal year 2009amendments described below to the agreement that governs the Revolving CreditFacility, the expiration date of the Revolving Credit Facility was December 19,2008, at which time any outstanding principal amounts would have becomedue.  Borrowings under the RevolvingCredit Facility bore interest at a fluctuating rate based upon a base rate or aEurodollar rate plus an applicable margin. As of June 30, 2008, the applicable margin for base rate loans was1.00% per annum and the applicable margin for Eurodollar loans was 2.00% perannum.  As of June 30, 2008, thefees associated with issuing letters of credit under the Revolving CreditFacility were 1.75% per annum.  At June 30,2008, the total availability under the Revolving Credit Facility was $193.9million, of which $147.9 million was utilized in the form of outstandingletters of credit.  There were no cashborrowings under the Revolving Credit Facility during the fiscal year ended June 30,2008.

 

At June 30, 2009,the total availability under the Revolving Credit Facility was $147.8 million,of which of which the maximum the Company could utilize was $115.0 million as aresult of amendments to the Revolving Credit Facility during fiscal year2009.  As of June 30, 2009, $96.3million of availability was utilized in the form of outstanding letters ofcredit.  There were no cash borrowingsoutstanding under the Revolving Credit Facility at June 30, 2009 other thanthe $5.4 million of Bridge Financing loans (as defined below).  During the fiscal year ended June 30,2009, the Company borrowed $30.0 million of cash advances under the RevolvingCredit Facility, all of which was repaid prior to June 30, 2009.  Total interest expense associated with thesecash borrowings was less than $0.1 million for the fiscal year ended June 30,2009.

 

The agreement thatgoverned the Revolving Credit Facility, as revised for the amendments describedbelow, contained customary covenants that restrict certain of the Company’sactivities including, among others, limitation on capital expenditures,disposal of property and equipment, additional indebtedness, issuance ofcapital stock and dividend payments.  Theagreement that governed the Revolving Credit Facility, as amended, alsocontained customary events of default. The Company was in compliance with the covenants under the AmendedRevolving Credit Agreement as of June 30, 2009, including the milestoneevents relating to a Liquidity Event.

 

The sharp drop in naturalgas market prices during the first six months of fiscal year 2009 resulted in asignificant reduction in the available borrowing base under the RevolvingCredit Facility, which strained the Company’s ability to post letters of creditas collateral with suppliers and hedge providers, resulting in waivers obtainedfrom lenders related to certain provisions included in the agreement thatgoverns the Revolving Credit Facility, and ultimately resulting in materialamendments to the agreement that governs the Revolving Credit Facility (the “2009Amendments”).

 

As a result of the 2009Amendments, the Company was required to actively seek a new facility to replacethe Revolving Credit Facility and Hedge Facility.  Various milestone events and dates wereestablished by the 2009 Amendments and were eventually met by the Company, allleading to development and consummation of the Restructuring on September 22,2009.

 

Other material impacts ofthe 2009 Amendments are summarized as follows:

 

·      Thematurity date of the Revolving Credit Facility was extended to September 21,2009 from December 19, 2008.

·      Themaximum amount that the Company could borrow under the Revolving CreditFacility was incrementally reduced from $280.0 million at June 30, 2008 to$115.0 million at June 30, 2009 and to $94 million from July 31, 2009through the termination date.

·      In November 2008,the Company was required to obtain $10.4 million of additional debt financingfrom Denham Commodity Partners Fund LP (“Denham”) and Charter Mx LLC, bothsignificant stockholders of the Company, and four members of the Company’ssenior management team (the “Bridge Financing”; refer to Note 19).

·      TheCompany was required to borrow the $12.0 million available balance under the DenhamCredit Facility by November 7, 2008.

·      Thevolume of natural gas that could be maintained in inventory was limited tomaximum amounts ranging from a maximum of: (a) 4.2 million MMBtus on anydate from May 15, 2009 through May 31, 2009; (b) 5.1 millionMMBtus on any date during the month of June 2009; (c) 5.6 millionMMBtus on any date during the month of July 2009; and 6.1 million MMBtuseffective for the period July 31, 2009 through the termination date.

·      TheCompany’s marketing expenses were limited to $0.2 million per week effective May 15,2009.

·      TheCompany was required to maintain a minimum balance of cash with theadministrative agent as security for all obligations of the Revolving CreditFacility, which increased from $60.0 million effective May 15, 2009, to$65

 

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million effective May 29, 2009, and to $75.0million effective June 15, 2009 until termination of the Revolving CreditFacility and cancellation of all letters of credit issued thereunder.

·      EffectiveNovember 17, 2008, the aggregate outstanding principal amount of cashadvances under the Revolving Credit Facility was limited to $20.0 million.  Effective March 11, 2009, the Company’sability to make cash advances under the Revolving Credit Facility waseliminated.

·      EffectiveSeptember 30, 2008, any plan of the Company to acquire customer portfoliosor operations of other companies required the explicit approval by lendersholding a majority of the commitments under the Revolving Credit Facility.  Effective May 15, 2009, any acquisitionof customer portfolios or operations of other companies were strictlyprohibited.

·      TheCompany was temporarily allowed to exceed the maximum amount that can beborrowed under the Revolving Credit Facility by various amounts that decreasedincrementally from $35.0 million effective in November 2008 to $0effective in March 2009.

·      From November 1,2008 through November 17, 2008, the Company was temporarily allowed torequest issuance of letters of credit of up to $25,360,000 without deductingsuch letters of credit from the available borrowing base.

·      EffectiveMay 15, 2009, the aggregate amount of letters of credit that may be issuedwith an expiration date beyond October 31, 2009 was limited to $40.0million.

·      Themargin added to base rate loans and various letter of credit and other facilityfees were increased.

·      Financialcovenants related to consolidated tangible net worth, consolidated workingcapital, interest coverage and negative allowed consolidated earnings were eachamended.

·      TheCompany was required to have at least $10.0 million in available borrowing baseon and after April 30, 2009.

·      TheCompany was required to have at least $40.0 million in cash and cashequivalents at all times on and after April 30, 2009, excluding any suchcash and cash equivalents acquired from the proceeds of advances under theRevolving Credit Facility.

·      TheCompany paid approximately $8.7 million of amendment fees, legal fees andconsulting fees and other costs directly related to various amendments of theRevolving Credit Facility and the Hedge Facility during the fiscal year ended June 30,2009, which were deferred on the consolidated balance sheet and amortized overthe remaining terms of the facilities. Incremental amortization expense associated with these deferred costswas approximately $7.5 million during fiscal year 2009.

 

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, theprimary obligors are MXenergy Inc., MXenergy Electric Inc. and all obligationsare guaranteed by Holdings and its other domestic subsidiaries.  Obligations under the Commodity SupplyFacility are secured by a first priority lien on substantially all of theHoldings’ and its domestic subsidiaries’ existing and future assets that arenot restricted as to use under bondholder agreements.   The maturity date of the Commodity SupplyFacility is August 31, 2012, provided that RBS Sempra will have the rightto extend such maturity date by one year in its sole discretion, if notice isprovided 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 CommoditySupply Facility will provide 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 will provide for RBS Sempra to act on the Company’s behalf tosatisfy the requirements of regional transmission operators for capacity rightsand ancillary services.

 

Under the supply terms ofthe Commodity Supply Facility, the Company has the ability to: (1) seekcommodity price quotes from third parties for certain physically or financiallysettled transactions with respect to gas and electricity; and (2) requestthat RBS Sempra enter into such transactions with such third parties at suchprices and to concurrently enter into back-to-back off-setting transactionswith the Company with respect to such third party transactions.  RBS Sempra would not be obligated to enterinto a transaction with any third party unless RBS Sempra is satisfied withsuch transaction and unless the volume of those transactions does not exceedannual limits.  In addition to the actualpurchase price paid by RBS Sempra and certain related costs and expenses, theCompany will be charged an adder for such purchases.

 

The Commodity SupplyFacility also provides for certain volumetric adder fees for all natural gasand electricity 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.

 

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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 priceportfolio of hedges will be limited to a weighted-average volumetric tenor notto exceed 14 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 residentialcustomer equivalents operating under fixedprice 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 Libor plus 3%, but not less than 4%; 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.

 

With regards to theaggregate exposure outstanding under the Commodity Supply Facility, the Companymust maintain a ratio of eligible current working capital assets to outstandingsupply and financing exposure (excluding any exposure related to hedgingactivities) greater than 1.25:1.0 during the months of October throughMarch, and greater then 1.4:1.0 during the months of April throughSeptember; (the “Collateral Coverage Ratio”). In addition, the Company must maintain a consolidated tangible networth, as defined in the agreement that governs the Commodity Supply Facilityof at least $60.0 million.

 

On September 22,2009, certain of the Company’s hedging transactions with under the HedgeFacility were novated or otherwise transferred to RBS Sempra.  In addition, the Commodity Supply Facility requiresthe Company to unwind certain existing physical and financial forward swapssubsequent to closing, with RBS Sempra providing any credit support necessaryto liquidate those positions.

 

In connection withconsummation of the Commodity Supply Facility, RBS Sempra was issued a numberof shares of Holdings’ Class B Common Stock equal to 7.37% of theoutstanding common stock on Restructuring consummation date.

 

The agreements thatgovern the Commodity Supply Facility contain customary covenants that restrictcertain activities including, among other things, the Company’s ability to:

 

·      incuradditional indebtedness;

·      createor incur liens;

·      guaranteeobligations of other parties;

·      engagein mergers, consolidations, liquidations and dissolutions;

·      createsubsidiaries;

·      makeacquisitions;

·      engagein certain asset sales;

·      enterinto leases or sale-leasebacks;

·      makeequity distributions;

·      makecapital expenditures;

·      makeloans and investments;

·      makecertain dividend, debt and other restricted payments;

·      engagein a different line of business;

·      amend,modify or terminate certain material agreements in a manner that is adverse tothe lenders; and

·      engagein certain transactions with affiliates.

 

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

 

·      paymentdefaults;

·      breachesof representations and warranties;

·      covenantdefaults;

·      crossdefaults to certain other indebtedness (including the Fixed Rate Notes due2014) in excess of specified amounts;

·      certainevents of bankruptcy and insolvency;

·      ERISAdefaults;

·      judgmentsin excess of specified amounts;

 

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·      failureof any guaranty or security document supporting the New Facilities to be infull force and effect;

·      thetermination or cancellation of any material contract which termination orcancellation could reasonably be expected to have a material adverse effect onus; or

·      achange of control.

 

***Note 16.  Long-Term Debt***

 

***FloatingRate Notes due 2011***

 

On August 4, 2006,Holdings issued $190.0 million aggregate principal amount of Floating RateNotes due 2011, which mature on August 1, 2011.  The notes were issued at 97.5% of par valueand bear interest at LIBOR plus 7.5% per annum. Interest is reset and payable semi-annually on February 1 and August 1of each year.

 

The interest rate on theFloating Rate Notes due 2011 was 9.13% and 10.69% at June 30, 2009 and2008, respectively.  The weighted-averageinterest rate was 10.02%, 11.95% and 12.97% for the fiscal years ended June 30,2009, 2008 and 2007, respectively.  Totalinterest expense associated with the Floating Rate Notes due 2011, excludingthe impact of mark-to-market adjustments related to interest rate swaps, was$16.8 million, $21.0 million and $21.2 million for the fiscal years ended June 30,2009, 2008 and 2007, respectively.

 

We have entered intointerest rate swap agreements to economically hedge the floating rate interestexpense on the Floating Rate Notes due 2011. Refer to Note 13 for additional information regarding the Company’s useof interest rate swaps.

 

The original issuediscount of approximately $4.8 million is being amortized to interest expenseratably over the term of the Floating Rate Notes due 2011.  Amortization of original issue discount tointerest expense for the fiscal years ended June 30, 2009, 2008 and 2007was approximately $0.8 million, $1.1 million and $1.0 million,respectively.  These amounts include theimpact of the early extinguishment of Floating Rate Notes due 2011 discussed inthe following paragraphs.

 

On December 13,2006, the Company purchased $12.0 million aggregate principal amount ofFloating Rate Notes due 2011 outstanding, plus accrued interest, from anoteholder for an amount less than face value. The Company utilized the Denham Credit Facility (refer to Note 19) toacquire such Floating Rate Notes due 2011. This transaction resulted in a gain on early extinguishment of debt ofapproximately $1.0 million, which was recorded as a reduction of interest expensefor the fiscal year ended June 30, 2007. The Company also recorded as additional interest expense $0.6 million oforiginal issue discount and debt issuance costs for the fiscal year ended June 30,2007, which represents a pro rata portion of such costs that were deferred atthe issuance date of the Floating Rate Notes due 2011.

 

During the fiscal yearended June 30, 2008, the Company utilized cash and cash equivalents toacquire $12.8 million aggregate principal amount of outstanding Floating Rate Notesdue 2011 from noteholders, in each case, for an amount less than facevalue.  These transactions resulted in$0.8 million of aggregate gains on the early extinguishment of debt that wasrecorded as a reduction of interest expense for the fiscal year ended June 30,2008.  The Company also recorded asadditional interest expense $0.5 million of original issue discount and debtissuance costs for the fiscal year ended June 30, 2008, which represents apro rata portion of such costs that were deferred at the issuance date of theFloating Rate Notes due 2011.

 

As of June 30, 2009,the Company had $165.2 million aggregate principal amount of Floating RateNotes due 2011 outstanding.  On September 22,2009, the Company consummated an exchange offer of $158.8 million aggregateprincipal amount of outstanding Floating Rate Notes due 2011 for $26.7 millionof cash, $67.8 million aggregate principal amount of Fixed Rate Notes due 2014and 33,940,683 shares of newly authorized Class A Common Stock.  The shares of Class A Common Stockissued to the holders of the Fixed Rate Notes due 2014 represented 62.5% of thetotal aggregate shares of common stock outstanding after consummation of theRestructuring.

 

Holders of approximately$6.4 million aggregate principal amount of Floating Rate Notes due 2011 did nottender their notes pursuant to the Restructuring.  These Floating Rate Notes due 2011 willremain on the consolidated balance sheets until their maturity date in August 2011unless acquired by us sooner.  The indenturegoverning the Floating Rate Notes due 2011 was amended to eliminatesubstantially all of the restrictive covenants and certain events of defaultfrom such indenture.

 

***FixedRate Notes due 2014***

 

Pursuant to theRestructuring consummated on September 22, 2009, the Company issued $67.8million aggregate principal amount 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, commencing on February 1,2010, to the holders of record of the Fixed Rate Notes due 2014 on theimmediately preceding January 15 and July 15.  The Fixed Rate Notes due

 

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2014 will mature on August 1,2014.  The Fixed Rate Notes due 2014 wereissued at a discount, which will be recorded as a reduction from the Fixed RateNotes due 2014 balance on the Company’s consolidated balance sheets during thefirst quarter of fiscal year 2010, and which will be amortized as an increaseto interest expense over the remaining life of the Fixed Rate Notes due 2014.

 

The Fixed Rate Notes due2014 are senior subordinated securedobligations of the Company, subordinated in right of payment to obligations ofthe 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 theoutstanding Commodity Supply Facilityobligations.

 

The Fixed Rate Notes due 2014 are jointly, severally,fully and unconditionally guaranteed by all domestic subsidiaries of Holdings.

 

The Fixed Rate Notes due2014 are secured by a first priority security interest in a cash escrow accountmaintained as security for future payments to holders of the Fixed Rate Notesdue 2014 (the “Notes Escrow Account”) and by a second-priority securityinterest in substantially all other existing and future assets of theCompany.  The Notes Escrow Account wasfunded with approximately $9.0 million, which represents approximate interestpayable by the Company on the Fixed Rate Notes due 2014 for a twelve-monthperiod.

 

At any time, or from timeto 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 principal amount of the Fixed Rate Notes due 2014 issued; or (2) up to 35% of the principal amount of the Fixed Rate Notes due 2014 issued at aredemption price of 113.250% of the principal amount thereof, plus accrued andunpaid interest thereon, if any, to the date of redemption, provided that:

 

·      ifthe Company redeems less than all of the Fixed Rate Notes due 2014, at least65% of the principal amount of the Fixed Rate Notes due 2014 issued under theIndenture remains outstanding immediately after any such redemption; and

·      theCompany makes such redemption not more than 90 days after the consummationof any such equity offering.

 

After August 11,2011, the Company may redeem the Fixed Rate Notes due 2014 at its option, inwhole or in part, upon not less than 30 nor more than 60 days’ notice, at theredemption prices specified in the agreement that governs the Fixed Rate Notesdue 2014.

 

Upon a change of controlof the Company, the Company will be required to make an offer to purchase eachholder’s Fixed Rate Notes due 2014 at a price of 101% of the then outstandingprincipal amount thereof, plus accrued and unpaid interest.

 

Holdings has nosignificant independent operations.  Eachof Holdings’ domestic U.S. subsidiaries jointly and severally, fully andunconditionally guarantees the Floating Rate Notes due 2011 and the Fixed RateNotes due 2014.  Refer to Note 23 forconsolidating financial statements of Holdings and its guarantor andnon-guarantor subsidiaries.

 

The indenture governingthe Fixed Rate Notes due 2014 contains restrictions on Holdings and itsdomestic subsidiaries with regard to declaring or paying any dividend ordistribution on Holdings capital stock. As of June 30, 2009, the Company was in compliance with allprovisions of the indenture governing the Floating Rate Notes due 2011.

 

***Note 17.  Redeemable Convertible Preferred Stock***

 

Prior to consummation ofthe 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 of approximately$1.6 million were deducted from the carrying value of the Preferred Stock,which resulted in a net carrying value of approximately $29.4 million at June 30,2007.

 

The Company hasdetermined 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. Therefore, the Preferred Stock is recorded outside of stockholders’equity on the consolidated balance sheets. As of June 30, 2008, the Company determined that it was probablethat the Preferred Stock would become redeemable at June 30, 2009, whichis the earliest possible date that the Preferred Investors could have causedthe Company to make the redemption election described under the redemption

 

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provisions of thePreferred Stock Purchase Agreement.  Asof June 30, 2009, the Company determined that the Preferred Stock becameredeemable as of that date. Therefore, as of June 30, 2009 and 2008, thecarrying value of the Preferred Stock was adjusted to reflect the estimatedredemption value, which represents the amount that provides the PreferredInvestors with a minimum annual rate of return of 12%, compounded annuallythrough June 30, 2009, as guaranteed to the Preferred Investors under thedividend provisions of the Preferred Stock Purchase Agreement withcorresponding charges of $5.9 million and $19.4 million recorded to retainedearnings or additional paid in capital during the fiscal years ended June 30,2009 and 2008, respectively.

 

The Preferred Investorshad the right at any time to convert their shares of Preferred Stock intoshares of Holdings’ common stock.  Uponconversion, the number of shares of common stock to be issued shall be thenumber of shares of Preferred Stock outstanding; adjusted in accordance withconversion provisions in the Preferred Stock Purchase Agreement that guaranteethe Preferred Investors a minimum annual rate of return equal to 12% per annum,compounded annually.  The conversionprice was subject to certain anti-dilution provisions included in the PreferredStock Purchase Agreement.  As of June 30,2009, 1,451,310 shares of Holdings’ common stock were reserved for issuanceupon conversion of the Preferred Stock.

 

On September 22,2009, all outstanding shares of Preferred Stock were exchanged for 11,862,551shares of newly authorized Class C Common Stock, which represented 21.84%of the aggregate total shares of the Company’s common stock outstanding as ofthe consummation date of the Restructuring. The excess of the redemption value over the aggregate fair value ofcommon stock issued to the preferred shareholders was reclassified tostockholders’ equity on the consolidated balance sheets during the firstquarter of fiscal year 2010.  Inconnection with the Restructuring, Holdings filed an amended and restatedCertificate of Incorporation that does not authorize any Preferred Stock.

 

***Note 18.  Common Stock***

 

**Amendmentand Restatement of Corporate Documents**

 

On the consummation dateof the of the Restructuring, the Company’s Certificate of Incorporation andBylaws were amended and restated, and certain holders of common stock enteredinto a Stockholders Agreement.  Thesedocuments contain customary provisions, including provisions relating tocertain approval rights, preemptive rights, share transfer restrictions, rightsof first refusal, tag-along rights and drag-along rights.

 

Additionally, the amendedand restated Certificate of Incorporation authorized 200,000,000 shares ofCommon Stock, consisting of 50,000,000 shares of Class A Common Stock,10,000,000 shares of Class B Common Stock, 40,000,000 shares of Class CCommon Stock and 100,000,000 shares of Class D Common Stock.  Prior to the consummation of theRestructuring, the Company had 4,681,219 shares of common stock issued andoutstanding.  Those shares of commonstock were exchanged for 4,499,588 shares of newly authorized Class CCommon Stock, which represented 8.29% of the aggregate total shares of commonstock outstanding after the consummation of the Restructuring.  Additional shares of Class A CommonStock, Class B Common Stock and Class C Common Stock were issued tovarious parties as a result of the Restructuring.

 

**Stock-BasedCompensation Plans**

 

The purpose of theCompany’s stock-based compensation plans is to attract and retain qualifiedemployees, consultants and other service providers by providing them withadditional incentives and opportunities to participate in the Company’sownership, and to create interest in the success and increased value of theCompany.  The plans are administered bythe Compensation Committee of the Board of Directors.  The Compensation Committee has the authorityto: (1) interpret the plans and to create or amend its rules; (2) establishaward guidelines under the plans; and (3) determine, or delegate thedetermination to management, the persons to whom awards are to be granted, thetime at which awards will be granted, the number of shares to be represented byeach award, and the consideration to be received, if any.  Option awards under the plans generally aregranted with an exercise price equal to the fair value of Holdings’ commonstock at the grant date, vest ratably based on three years of continuousservice and have ten year contractual terms.

 

As of June 30, 2009,the Company had three active stock-based compensation plans under whichwarrants and options (collectively referred to as “awards”) have been grantedto employees, directors and other non-employees:

 

·      ***2001Incentive Stock Option Plan (the “2001 ISO Plan”)*****–**  The 2001 ISOPlan allows for awards of stock or stock options not to exceed the 366,500shares of Holdings’ common stock reserved as a pool for distribution toemployees and non-employees.  As of June 30,2009, there were no shares available under the 2001 ISO Plan for future award.

 

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·      ***2003Incentive Stock Option Plan (the “2003 ISO Plan”) –*** The 2003 ISO Plan allows for awards ofstock or stock options not to exceed the 400,000 shares of Holdings’ commonstock reserved as a pool for distribution to employees and non-employees.  As of June 30, 2009, there were 68,396****shares available under the 2003 ISO Planfor future award.

 

·      ***2006Equity Incentive Compensation Plan (the “2006 EIC Plan”) –*** The 2006 EIC Plan allows for awards ofoptions, restricted stock, phantom shares, dividend equivalent rightsperformance awards or stock appreciation rights, to employees, members of theBoard of Directors, officers, consultants and other service providers.  Up to 750,000 shares of Holdings’ commonstock have been authorized to be issued for awards under the 2006 EICPlan.  As of June 30, 2009, 328,066shares were available under the 2006 EIC Plan for future award.  The adoption of the 2006 EIC Plan had noimpact on the 2001 ISO Plan or the 2003 ISO Plan.

 

The Company did not grantany other awards of options under any of its stock-based compensation plansduring the fiscal year ended June 30, 2009.

 

As of June 30, 2009,981,270 options to purchase common stock were outstanding under the Company’sthree approved stock-based compensation plans. The Company recorded approximately $1.1 million, $2.2 million and $2.2million of compensation expense in general and administrative expenses duringthe fiscal years ended June 30, 2009, 2008 and 2007, respectively, relatedto these outstanding awards.  Since alloutstanding options and warrants have been cancelled pursuant to theRestructuring, the Company does not expect to record any expense related tooptions and warrants during fiscal year 2010.

 

As of June 30, 2009,34,600 options to purchase common stock have been issued to two non-employeedirectors of the Company.  These optionshave a weighted average exercise price of $12.75 per share and are fully-vestedas of June 30, 2009.

 

As of June 30, 2009,the Company had options and warrants outstanding which were, 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) .  Pursuant to theRestructuring, the Company announced its intention to terminate the 2001 ISOPlan, the 2003 ISO Plan and the 2006 EIC Plan and offered a cash settlement toholders of options and warrants in exchange for their agreement to cancel andterminate such options and warrants.  Thetotal amount required for such cash settlement payments was approximately $0.2million, which was recorded as general and administrative expense during thefirst quarter of fiscal year 2010.

** **

**WarrantsIssued to Employees and Related Parties**

 

The Company has issuedwarrants to purchase common stock to certain employees and related parties thatwere not issued under any of the Company’s three approved stock-basedcompensation plans.  As of June 30,2009, the Company had 27,500 warrants to purchase common stock outstanding thatwere granted to employees prior to June 30, 2006 and are accounted forusing variable plan accounting.  Forthese warrants, changes in the estimated fair value of the Company’s commonstock between the grant date and the exercise date result in correspondingadjustments to compensation expense during the period in which the change inthe estimated fair value of common stock occurs.  Total compensation expense (reduction ofcompensation expense) related to these warrants was ($0.6) million (($0.4)million net of tax), ($0.5) million (($0.3) million net of tax) and $2.3million ($1.4 million net of tax) during the fiscal years ended June 30,2009, 2008 and 2007, respectively.

 

As of June 30, 2008,Denham held 1,544,736 fully-vested warrants to purchase common stockoutstanding, with a weighted average exercise price of $9.79 per share.  In September 2008, Denham exercisedthese warrants in a cashless transaction, resulting in the issuance of1,054,982 shares of Holdings’ common stock. Denham forfeited the right to acquire 489,754 shares of Holdings’ commonstock under the warrants as consideration for the cashless exercise.  These warrants were not subject to variableplan accounting because there was no future requirement to provide any servicesto the Company in order for Denham to exercise the warrants.  Therefore, the Company did not record anyexpense related to these warrants during the fiscal years ended June 30,2009, 2008 or 2007.

 

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Outstanding awards of alloptions and warrants to purchase common stock are summarized in the followingtables.

 
| ** **                                                                       | ** ** | **Awards Outstanding at June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2009**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                       | ** ** | **Number of  Awards**                             | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number of  Awards** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number of  Awards** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                                                                             |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of year                                                 | ** ** | **2,666,056**                                          | ** ** | **$** | **17.16** |   | 2,931,406 |   | $ | 16.35 |   | 2,538,106 |   | $ | 10.87 |   |
| Granted                                                                          | ** ** | **—**                                             |       | — |   | 7,500 |   | 50.10 |   | 508,000 |   | 42.90 |   |
| Exercised                                                                        | ** ** | **(1,591,436**                                         | **)**      | **9.78** |   | (224,417 | ) | 4.18 |   | (29,000 | ) | 3.08 |   |
| Forfeited                                                                        | ** ** | **(49,300**                                            | **)**      | **11.09** |   | (48,433 | ) | 33.57 |   | (40,700 | ) | 28.73 |   |
| Expired                                                                          | ** ** | **(16,550**                                            | **)**      | **8.80** |   | — |   | — |   | (45,000 | ) | 4.40 |   |
| Outstanding at end of year                                                       | ** ** | **1,008,770**                                          | ** ** | **29.24** |   | 2,666,056 |   | 17.16 |   | 2,931,406 |   | 16.35 |   |
| Weighted average fair value of grants during the  year                           | ** ** | ** **                                             | ** ** | **$** | — |   |   |   | $ | 13.70 |   |   |   | $ | 12.31 |   |
| Total intrinsic value of awards exercised during  fiscal year 2009 (in millions) | ** ** | **$**                                                  | **33.0**   |   |   |   |   |   |   |   |   |   |   |   |
| Total intrinsic value of awards outstanding at  June 30, 2009 (in millions) | ** ** | **$**                                                  | **0.1**    |   |   |   |   |   |   |   |   |   |   |   |

 
| ** **           | ** ** | **Awards Outstanding at June 30,** | ** ** |
|----------------------|------------|--------------------------------------------------------|------------|
| ** **           | ** ** | **2009**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Exercise  Price**  | ** ** | **Number of  Awards  Outstanding**                | ** ** | **Number of  Awards  Exercisable** | ** ** | **Weighted-  Average  Contractual  Life  Remaining** | ** ** | **Number of  Awards  Outstanding** | ** ** | **Number of  Awards  Exercisable** | ** ** | **Number of  Awards  Outstanding** | ** ** | **Number of  Awards  Exercisable** | ** ** |
|                 |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| $1.00                | ** ** | **72,500**                                             | ** ** | **72,500** | ** ** | **2.7 Years** |   | 100,000 |   | 100,000 |   | 110,000 |   | 110,000 |   |
| $2.16                |       | —                                                 |       | — |   | — |   | — |   | — |   | 132,450 |   | 132,450 |   |
| $3.72 – $5.35   | ** ** | **10,000**                                             | ** ** | **10,000** | ** ** | **2.7 Years** |   | 10,000 |   | 10,000 |   | 47,500 |   | 47,500 |   |
| $6.99 – $9.12   | ** ** | **115,350**                                            | ** ** | **115,350** | ** ** | **4.1 Years** |   | 1,163,263 |   | 1,163,263 |   | 1,215,863 |   | 1,215,863 |   |
| $11.64 – $15.00 |       | —                                                 |       | — |   | — |   | 562,573 |   | 562,573 |   | 562,573 |   | 562,573 |   |
| $21.50 – $25.00 | ** ** | **220,920**                                            | ** ** | **220,920** | ** ** | **3.7 Years** |   | 233,820 |   | 233,820 |   | 234,420 |   | 162,947 |   |
| $27.50 – $33.67 | ** ** | **124,000**                                            | ** ** | **124,000** | ** ** | **5.1 Years** |   | 128,500 |   | 128,500 |   | 136,300 |   | 91,200 |   |
| $42.57 – $50.10 | ** ** | **466,000**                                            | ** ** | **309,833** | ** ** | **7.0 Years** |   | 467,900 |   | 157,067 |   | 492,300 |   | 5,000 |   |
| ** **           | ** ** | **1,008,770**                                          | ** ** | **852,603** |   |   |   | 2,666,056 |   | 2,355,223 |   | 2,931,406 |   | 2,327,533 |   |

 

The weighted-averageremaining term for all outstanding awards as of June 30, 2009 wasapproximately 5.3 years.  Theweighted-average remaining term for all exercisable awards as of June 30,2009 was approximately 5.0 years.  Theweighted average exercise price of awards exercisable as of June 30, 2009was $26.69 per share.

 

The aggregate proceedsfrom exercises of options and warrants were $15.6 million, $0.4 million, andless than $0.1 million for the fiscal years ended June 30, 2009, 2008 and2007, respectively.   The tax benefit forthe Company from the exercise of options and warrants was less than $0.1million, $0.8 million and $0.2 million for the fiscal years ended June 30,2009, 2008 and 2007, respectively, which was recorded as a reduction of currenttax liability and an increase to additional paid-in capital.

 

**CommonStock Issued to Senior Executives**

 

In March 2008, theCompensation Committee of the Company’s Board of Directors approved theissuance of a combined total of 19,000 fully vested shares of Holdings’ commonstock to the Company’s Chief Executive Officer and Executive VicePresident.  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.

 

**NewManagement Incentive Plan**

 

In connection with theRestructuring, it is anticipated that the Company’s board of directors willauthorize the creation of a new management incentive plan (the “Management IncentivePlan”) to issue Class C Common Stock not to exceed 10% of the Company’soutstanding common stock (on a fully diluted basis) after giving effect to theRestructuring.  The Company expects thatthe Management Incentive Plan will provide the board of directors theflexibility to make awards to employees, officers, directors, consultants andadvisors and will permit, among other things, the grant of options to purchaseshares of common stock that are intended to qualify as incentive stock optionsunder Section 422 of the Internal Revenue Code, grants

 

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of options to purchaseshares of common stock that will not so qualify, grants of stock appreciationrights, and grants of common stock at incentive prices or for free.

 

***Note 19.  Related Party Transactions***

 

**CreditAgreement with Denham Commodity Partners Fund LP**

 

Denham Commodity PartnersFund LP is a significant stockholder of the Company.  Denham has extended a $12.0 million line ofcredit to the Company, which bears interest at 9% per annum.  The termination date for the Denham CreditFacility is May 19, 2010, at which time any outstanding principal balancebecomes due.  In accordance with the September 30,2008 amendment and restatement of the agreement that governs the RevolvingCredit Facility (refer to Note 15), the Company was required to borrow anyavailable balance under the Denham Credit Facility prior to November 7,2008, and to maintain such balance outstanding until the Revolving CreditFacility expires.  In September 2008,the Company borrowed the entire $12.0 million available line under the DenhamCredit Facility.  The entire outstanding balance under the Denham Credit Facility wasrepaid, including accrued and unpaid interest, and the facility was terminatedon September 22, 2009.

 

Interest expense relatedto the Denham Credit Facility was approximately $0.8 million, $0.5 million and$0.5 million for the fiscal years ended June 30, 2009, 2008 and 2007,respectively.

 

**LegalServices**

 

A former director andsignificant current stockholder of the Company is senior counsel to Paul,Hastings, Janofsky & Walker LLP (“Paul Hastings”), a law firm thatprovides legal services to the Company. During the fiscal years ended June 30, 2009, 2008 and 2007, PaulHastings provided the Company with legal services totaling $1.9 million, $0.6million and $1.2 million, respectively, of which $1.2 million, $0.6 million and$0.8 million, respectively, were for general legal services recorded as generaland administrative expenses.  Theremaining $0.7 million and $0.4 million of fees for the fiscal years ended June 30,2009 and 2007, respectively, primarily related to issuance of debt andacquisitions and were deferred on the consolidated balance sheets, to beamortized over the estimated useful lives associated with the relatedtransactions.  The Company expects thatPaul Hastings will continue to provide legal services to the Company in futureperiods.

 

**FinancialAdvisory Services**

 

The Company has afinancial advisory services agreement with Greenhill & Co., LLC (“Greenhill”),an affiliate of Greenhill Capital Partners, a significant stockholder of theCompany (the “Greenhill Agreement”).  In April 2008,the Company entered into an engagement letter with Greenhill that amends theGreenhill Agreement by: (1) expanding the definition of the potentialtransaction specified in the Greenhill Agreement; and (2) outlining feesassociated with the occurrence of such a transaction.  In November 2008, the April 2008engagement letter was amended to: (1) extend the engagement; (2) furtherexpand the definition of the potential transaction; and (3) revise thepotential fees associated with such a transaction.  Greenhill provided services to the Companytotaling approximately $0.3 million related to the Restructuring, which wererecorded as general and administrative expenses during the first quarter offiscal year 2010.

 

**ManagementFees**

 

The Company has agreed topay Denham, Daniel Bergstein and Charter Mx LLC, another significant stockholderof the Company, an aggregate annual fee of $0.9 million, payable in equalquarterly amounts, for management consulting services provided to theCompany.  These fees are recorded asgeneral and administrative expenses on the Company’s consolidated statements ofoperations.

 

In accordance with theterms of the Revolving Credit Agreement, payments to the shareholders for thesemanagement fees were deferred until consummation of the Restructuring on September 22,2009.

 

**WarrantsExercised by Denham**

 

As of June 30, 2008,Denham held 1,544,736 fully-vested warrants to purchase an equivalent number ofshares of Holdings’ common stock with a weighted average exercise price of$9.79 per share.  These warrants wereissued in connection with various previous debt financings and accordingly,were not subject to variable plan accounting. Therefore, the Company did not record any expense related to thesewarrants during fiscal years 2009 or 2008. In September 2008, Denham exercised these warrants in a cashlesstransaction, resulting in the issuance of 1,054,982 shares of Holdings’ commonstock.  Denham forfeited the right toacquire 489,754 shares of Holdings’ common stock under the warrants asconsideration for the cashless exercise.

 

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**BridgeFinancing Related to the Revolving Credit Agreement**

 

Pursuant to the AmendedRevolving Credit Agreement, on November 17, 2008, Charter Mx LLC, Denhamand four members of the Company’s senior management team agreed to provideBridge Financing in an aggregate amount of $10.4 million by becoming lenders ina new bridge loan tranche under the Amended Revolving Credit Agreement.  Bridge Financing loan amounts were asfollows: (1) $5.0 million each from Charter Mx LLC and Denham; and (2) $0.1million each from Jeffrey A. Mayer, Chief Executive Officer; Steven Murray,Chief Operating Officer; Carole R. Artman-Hodge, Executive Vice President; andChaitu Parikh, Chief Financial Officer. An upfront fee of 2% of the respective loan amount was paid to eachBridge Financing lender upon closing.

 

The Bridge Financing loanfrom Charter Mx LLC was repaid, with accrued interest, in April 2009.  The remaining Bridge Financing loans from allother lenders were repaid, with accrued interest, on the expiration date of theRevolving Credit Facility in September 2009.

 

Interest accrued to eachBridge Financing lender as follows: (1) 16% per annum from the closingdate through April 6, 2009; (2) 18% per annum from April 7, 2009through July 6, 2009; (3) 20% per annum from July 7, 2009through October 6, 2009; and (4) 22% per annum thereafter until theBridge Financing is repaid.  Charter MxLLC was guaranteed a minimum of $1.25 million of interest over the life of itsloan.  The remaining lenders areguaranteed an aggregate minimum of $1.62 million of interest, shared ratably inproportion to their outstanding loan balances over the lives of theiroutstanding loans.  During the fiscalyear ended June 30, 2009, the Company recorded approximately $2.7 millionof interest expense associated with the Bridge Financing.

 

***Note 20.  Employee Benefits***

 

The Company sponsors anemployee savings plan under Section 401(k) of the Internal RevenueCode for all full-time employees and part-time employees (who work at least1,000 hours annually) with at least three months of continuous service.  Eligible employees may make pre-taxcontributions up to 20% of their annual compensation, not to exceed the annuallimitation set forth in Section 402 (g) for any plan year.  The Company makes a matching contribution ofup to 10% of each participating employee’s compensation up to the maximumallowable under the plan.  Employeeswhose employment date is prior to July 1, 2007, are immediately 100%vested in all contributions.  Employercontributions for employees whose employment date is on or after July 1,2007 vest in increments of 25% per year. The Company made contributions of $1.4 million, $1.3 million and $1.0million for the fiscal years ended June 30, 2009, 2008 and 2007,respectively.

 

***Note 21.  Commitments and Contingencies***

 

**OperatingLeases**

 

The Company leases officespace under non-cancelable operating leases, which contain escalation clauses,have terms that expire between July 2009 and October 2017 and aresubject 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.  Rental expense related to the above leasedspaces was $1.3 million, $1.6 million and $0.5 million for the fiscal years endedJune 30, 2009, 2008 and 2007, respectively.  Future annual minimum lease payments underoperating leases are summarized in the following table.

 
| **Fiscal year** | ** ** | **Amount**              | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | **(in thousands)** | ** ** |
|                 |       |                    |       |
| 2010                 |       | $                       | 760        |   |
| 2011                 |       | 232                     |       |
| 2012                 |       | 208                     |       |
| 2013                 |       | 234                     |       |
| 2014                 |       | 234                     |       |
| Thereafter           |       | 844                     |       |
| Total                |       | $                       | 2,512      |   |

 

**CapacityCharge Commitments**

 

The Company enters intoagreements to transport and store natural gas. Since the demand for natural gas in the winter is high, the Companyagrees to pay for certain capacity for the transportation systems utilized forup to a twelve-month period.  Theseagreements are take-or-pay in that the Company must pay for the capacitycommitted even if it does not use the 

 

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capacity.  For contracts outstanding, as of June 30,2009, the total committed capacity charges were approximately $6.6million.  These agreements generally willexpire during various months during the fiscal year ending June 30, 2010,and will be replaced with new contracts as necessary.

 

**PhysicalCommodity Purchase Commitments**

 

The Company has forwardphysical contracts to acquire natural gas and electricity in specified futureperiods.   The contracts to acquirenatural gas generally have a fixed basis component and a variable componentdetermined based on market prices at purchase date.  Contracts to acquire electricity generallyare on a fixed basis.  All such contractsare considered to be “normal purchases” under U.S. GAAP, and therefore are notreported on the consolidated balance sheets.

 

As of June 30, 2009,the Company had forward physical contracts to purchase a total of 3,603,000MMBtus of natural gas beginning in July 2009 and ending in November 2010.  The amount of the fixed basis and variablecomponents of these contracts were $0.2 million and $14.7 million,respectively, at June 30, 2009.

 

As of June 30, 2009,the Company had forward physical contracts to purchase a total of 228,000 MWhrsof electricity beginning in July 2009 and ending in September 2011.  These contracts, which are all on a fixedbasis, amounted to $14.5 million at June 30, 2008.

 

As of June 30, 2009,total forward commitments to purchase natural gas and electricity were $25.2million for fiscal year 2010, $3.9 million for fiscal year 2011 and $0.3million for fiscal year 2012.

 

**Litigation**

 

From time to time, theCompany is a party to claims and legal proceedings that arise in the ordinarycourse of business, including investigations of product pricing and billingpractices by various governmental or other regulatory agencies.  Management does not believe that any suchproceedings to which the Company is currently a party will have a materialimpact on the Company’s results of operations or financial position.

 

The Company does not havephysical custody or control of any of the natural gas that is ultimatelyprovided to its customers, and does not have physical custody or control overany facilities used to transport natural gas to its customers.  Title to the natural gas sold to the Company’scustomers is passed at the same point at which the Company accepts title fromits natural gas suppliers.  Therefore,management does not believe that the Company has significant exposure to legalclaims or other liabilities associated with environmental concerns.

 

***Note 22.  Business Segments***

 

The Company’s corebusiness is the retail sale of natural gas and electricity to end-use customersin deregulated markets.  Accordingly, theCompany’s business is classified into two business segments: natural gas andelectricity.  Through these businesssegments, natural gas and electricity are sold at fixed and variable contractedprices based on the demand or usage of customers.

 

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Financial information forthe Company’s business segments is summarized in the following tables.

 
| **Fiscal year ended June 30,**                                                 | ** ** | **Natural Gas** | ** **  | **Electricity** | ** ** | **Total**     | ** **   |
|----------------------------------------------------------------------------------------------------|------------|----------------------|-------------|-----------------|------------|---------------|--------------|
| ** **                                                                                         | ** ** | **(in thousands)**   | ** **  |
| **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 and liabilities allocated to business  segments at period end:                              | ** ** | ** **           | ** **  | ** **      | ** ** | ** **    | ** **   |
| Accounts receivable, net                                                                           | ** ** | **$**                | **36,006**  | ** **      | **$**      | **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** | ** ** |
| ** **                                                                                         | ** ** | ** **           | ** **  | ** **      | ** ** | ** **    | ** **   |
| **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       |   |
|                                                                                               |       |                 |        |            |       |          |         |
| Assets and liabilities allocated to business  segments at period end:                              |       |                 |        |            |       |          |         |
| Accounts receivable                                                                                |       | $                    | 65,897      |            | $          | 21,776        |         | $ | 87,673 |   |
| Natural gas inventories                                                                            |       | 65,006               |        | —          |       | 65,006        |         |
| Goodwill                                                                                           |       | 3,810                |        | —          |       | 3,810         |         |
| Customer acquisition costs, net                                                                    |       | 34,439               |        | 7,254           |       | 41,693        |         |
| Total assets allocated to business segments                                                        |       | $                    | 169,152     |            | $          | 29,030        |         | $ | 198,182 |   |
|                                                                                               |       |                 |        |            |       |          |         |
| **2007:**                                                                                          |       |                 |        |            |       |          |         |
| Sales                                                                                              |       | $                    | 680,811     |            | $          | 23,115        |         | $ | 703,926 |   |
| Cost of goods sold (excluding unrealized gains  (losses) from risk management activities, net) (1) |       | (565,531             | )           | (19,536         | )          | (585,067      | )            |
| Gross profit (excluding unrealized gains (losses)  from risk management activities, net) (1)       |       | $                    | 115,280     |            | $          | 3,579         |         | 118,859 |   |
|                                                                                               |       |                 |        |            |       |          |         |
| Items to reconcile total segment gross profit to  loss before income tax benefit:                  |       |                 |        |            |       |          |         |
| Unrealized gains (losses) from risk management  activities, net                                    |       |                 |        |            |       | (17,079       | )            |
| Operating expenses                                                                                 |       |                 |        |            |       | (91,015       | )            |
| Interest expense, net of interest income                                                           |       |                 |        |            |       | (33,058       | )            |
|                                                                                               |       |                 |        |            |       |          |         |
| Loss before income tax benefit                                                                     |       |                 |        |            |       | $             | (22,293      | ) |

 

----

| (1) | Includes  realized losses from risk management activities, but excludes unrealized  gains (losses) from risk management activities. As the underlying customer  contracts are not marked to market, the unrealized gains (losses) from risk  management activities do 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 delivery of natural gas under the customer contracts  and the associated gain (loss) on risk management activity is realized. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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***Note 23.  Condensed Consolidating Financial Information***

 

The Floating Rate Notesdue 2011 were issued by Holdings in August 2006.  Each of the following wholly owned domesticsubsidiaries of Holdings (the “Guarantor Subsidiaries”) jointly, severally andunconditionally guarantees the Floating Rate Notes due 2011 on a seniorunsecured basis:

 

·                  MXenergy Capital Holdings Corp.

·                  MXenergy Capital Corp.

·                  Online Choice Inc.

·                  MXenergy Gas Capital Holdings Corp.

·                  MXenergy Gas Capital Corp.

·                  MXenergy Inc.

·                  MXenergy Electric Capital Holdings Corp.

·                  MXenergy Electric Capital Corp.

·                  MXenergy Electric Inc.

·                  Total Gas & Electric, Inc. (effective in August 2006,Total Gas & Electric, Inc. was merged with and intoMXenergy Inc.)

·                  Total Gas & Electricity (PA) Inc., d/b/a/ MXenergyElectric (PA) (effective in May 2007, Total Gas & Electricity(PA) Inc. was merged with and into MXenergy Electric Inc.)

·                  MXenergy Services Inc.

·                  Infometer.com Inc.

 

The only wholly ownedsubsidiary that is not a guarantor for the Floating Rate Notes due 2011 (the “Non-guarantorSubsidiary”) is MXenergy (Canada) Ltd.

 

Consolidating balancesheets, consolidating statements of operations and consolidating statements ofcash flows for Holdings, the combined Guarantor Subsidiaries and theNon-guarantor Subsidiary are provided in the following tables.  Elimination entries necessary to consolidatethe entities are also presented.

 

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** **

**MXENERGYHOLDINGS INC.**

**ConsolidatingBalance Sheet**

**June30, 2009**

**(inthousands)**

 
|                                                                  |       | ** **        |       | **Non-**       |       | ** **       |       |             |       |             |       |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
|                                                                  |       | **MXenergy**      |       | **Guarantor**  |       | **Guarantor**    |       |             |       |             |       |
| ** **                                                            | ** ** | **Holdings Inc.** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                            | ** ** | ** **        | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Assets**                                                            | ** ** | ** **        | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  assets:                                                      | ** ** | ** **        | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Cash  and cash equivalents                                            |       | $                 | —     |           | $          | 262              |       | $                | 23,004     |             | $          | — |   | $ | 23,266 |   |
| Restricted  cash                                                      |       | —            |       | —         |       | 75,368           |       | —           |       | 75,368           |       |
| Intercompany  receivable                                              |       | 191,399           |       | —         |       | —           |       | (191,399         | )          | —           |       |
| Accounts  receivable, net                                             |       | —            |       | 56             |       | 47,542           |       | —           |       | 47,598           |       |
| Natural  gas inventories                                              |       | —            |       | —         |       | 29,415           |       | —           |       | 29,415           |       |
| Current  portion of unrealized gains from risk management activities  |       | —            |       | —         |       | 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                                                 |       | 197,860           |       | 405            |       | 196,640          |       | (191,399         | )          | 203,506          |       |
| Unrealized  gains from risk management activities                     |       | —            |       | —         |       | —           |       | —           |       | —           |       |
| 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           |       |
| Long-term  investments                                                |       | (40,169           | )          | —         |       | —           |       | 40,169           |       | —           |       |
| Other  assets                                                         |       | 4,412             |       | —         |       | 576              |       | —           |       | 4,988            |       |
| Total  assets                                                         |       | $                 | 162,103    |           | $          | 434              |       | $                | 247,764    |             | $          | (151,230 | ) | $ | 259,071 |   |
|                                                                  |       |              |       |           |       |             |       |             |       |             |       |
| **Liabilities and stockholders’ equity**                         |       |              |       |           |       |             |       |             |       |             |       |
| Current  liabilities:                                                 |       |              |       |           |       |             |       |             |       |             |       |
| Accounts  payable and accrued liabilities                             |       | $                 | 7,842      |           | $          | 120              |       | $                | 25,338     |             | $          | — |   | $ | 33,300 |   |
| Accrued  commodity purchases                                          |       | —            |       | 40             |       | 9,807            |       | —           |       | 9,847            |       |
| Intercompany  payable                                                 |       | —            |       | 1,845          |       | 189,554          |       | (191,399         | )          | —           |       |
| Current  portion of unrealized losses from risk management activities |       | 4,176             |       | —         |       | 30,048           |       | —           |       | 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                                            |       | 12,018            |       | 2,005          |       | 276,418          |       | (191,399         | )          | 99,042           |       |
| Unrealized  losses from risk management activities                    |       | 4,127             |       | —         |       | 9,944            |       | —           |       | 14,071           |       |
| Long-term  debt:                                                      |       |              |       |           |       |             |       |             |       |             |       |
| Floating  Rate Notes due 2011                                         |       | 163,476           |       | —         |       | —           |       | —           |       | 163,476          |       |
| Total  long-term debt                                                 |       | 163,476           |       | —         |       | —           |       | —           |       | 163,476          |       |
| Total  liabilities                                                    |       | 179,621           |       | 2,005          |       | 286,362          |       | (191,399         | )          | 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          | )          | —           |       |
| Unearned  stock compensation                                          |       | —            |       | —         |       | —           |       | —           |       | —           |       |
| Accumulated  other comprehensive loss                                 |       | (3                | )          | (3             | )          | —           |       | 3                |       | (3               | )          |
| (Accumulated  deficit) retained earnings                              |       | (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                      |       | $                 | 162,103    |           | $          | 434              |       | $                | 247,764    |             | $          | (151,230 | ) | $ | 259,071 |   |

 

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**MXENERGYHOLDINGS INC.**

**ConsolidatingBalance Sheet**

**June 30,2008**

**(dollarsin thousands)**

 
| ** **                                                            | ** ** | **MXenergy  Holdings Inc.** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                            | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  assets:                                                      | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **       | ** ** |
| Cash  and cash equivalents                                            |       | $                           | —     |                            | $          | 970                         |       | $                | 70,988     |             | $          | — |   | $ | 71,958 |   |
| Restricted  cash                                                      |       | —                      |       | —                          |       | 587                         |       | —           |       | 587              |       |
| Intercompany  receivable                                              |       | 172,455                     |       | —                          |       | —                      |       | (172,455         | )          | —           |       |
| Accounts  receivable, net                                             |       | —                      |       | 28                              |       | 87,645                      |       | —           |       | 87,673           |       |
| Natural  gas inventories                                              |       | —                      |       | —                          |       | 65,006                      |       | —           |       | 65,006           |       |
| Current  portion of unrealized gains from risk management activities  |       | 183                         |       | —                          |       | 35,681                      |       | —           |       | 35,864           |       |
| Income  taxes receivable                                              |       | 7,524                       |       | —                          |       | —                      |       | —           |       | 7,524            |       |
| Other  current assets                                                 |       | —                      |       | 302                             |       | 3,059                       |       | —           |       | 3,361            |       |
| Total  current assets                                                 |       | 180,162                     |       | 1,300                           |       | 262,966                     |       | (172,455         | )          | 271,973          |       |
| Unrealized  gains from risk management activities                     |       | 234                         |       | —                          |       | 12,987                      |       | —           |       | 13,221           |       |
| Goodwill                                                              |       | —                      |       | —                          |       | 3,810                       |       | —           |       | 3,810            |       |
| Customer  acquisition costs, net                                      |       | —                      |       | 68                              |       | 41,625                      |       | —           |       | 41,693           |       |
| Fixed  assets, net                                                    |       | —                      |       | —                          |       | 10,525                      |       | —           |       | 10,525           |       |
| Deferred  income taxes                                                |       | —                      |       | —                          |       | 10,503                      |       | —           |       | 10,503           |       |
| Long-term  investments                                                |       | 74,949                      |       | —                          |       | —                      |       | (74,949          | )          | —           |       |
| Other  assets                                                         |       | 3,134                       |       | —                          |       | 893                         |       | —           |       | 4,027            |       |
| Total  assets                                                         |       | $                           | 258,479    |                            | $          | 1,368                       |       | $                | 343,309    |             | $          | (247,404 | ) | $ | 355,752 |   |
|                                                                  |       |                        |       |                            |       |                        |       |             |       |             |       |
| **Liabilities and stockholders’ equity**                         |       |                        |       |                            |       |                        |       |             |       |             |       |
| Current  liabilities:                                                 |       |                        |       |                            |       |                        |       |             |       |             |       |
| Accounts  payable and accrued liabilities                             |       | $                           | 8,816      |                            | $          | 305                         |       | $                | 27,481     |             | $          | — |   | $ | 36,602 |   |
| Accrued  commodity purchases                                          |       | —                      |       | 612                             |       | 50,849                      |       | —           |       | 51,461           |       |
| Intercompany  payable                                                 |       | —                      |       | 1,912                           |       | 170,543                     |       | (172,455         | )          | —           |       |
| Current  portion of unrealized losses from risk management activities |       | 2,187                       |       | —                          |       | 791                         |       | —           |       | 2,978            |       |
| Deferred  revenue                                                     |       | —                      |       | —                          |       | 7,435                       |       | —           |       | 7,435            |       |
| Deferred  income taxes                                                |       | —                      |       | —                          |       | 9,800                       |       | —           |       | 9,800            |       |
| Total  current liabilities                                            |       | 11,003                      |       | 2,829                           |       | 266,899                     |       | (172,455         | )          | 108,276          |       |
| Unrealized  losses from risk management activities                    |       | 2,839                       |       | —                          |       | —                      |       | —           |       | 2,839            |       |
| Long-term  debt:                                                      |       |                        |       |                            |       |                        |       |             |       |             |       |
| Floating  Rate Notes Due 2011                                         |       | 162,648                     |       | —                          |       | —                      |       | —           |       | 162,648          |       |
| Total  long-term debt                                                 |       | 162,648                     |       | —                          |       | —                      |       | —           |       | 162,648          |       |
| Total  liabilities                                                    |       | 176,490                     |       | 2,829                           |       | 266,899                     |       | (172,455         | )          | 273,763          |       |
|                                                                  |       |                        |       |                            |       |                        |       |             |       |             |       |
| Redeemable  convertible preferred stock                               |       | 48,779                      |       | —                          |       | —                      |       | —           |       | 48,779           |       |
|                                                                  |       |                        |       |                            |       |                        |       |             |       |             |       |
| Commitments  and contingencies                                        |       | —                      |       | —                          |       | —                      |       | —           |       | —           |       |
|                                                                  |       |                        |       |                            |       |                        |       |             |       |             |       |
| Stockholders’  equity:                                           |       |                        |       |                            |       |                        |       |             |       |             |       |
| Common  stock                                                         |       | 36                          |       | 1                               |       | —                      |       | (1               | )          | 36               |       |
| Additional  paid-in-capital                                           |       | 23,635                      |       | —                          |       | —                      |       | —           |       | 23,635           |       |
| Contributed  capital                                                  |       | —                      |       | —                          |       | 42,401                      |       | (42,401          | )          | —           |       |
| Unearned  stock compensation                                          |       | (4                          | )          | —                          |       | —                      |       | —           |       | (4               | )          |
| Accumulated  other comprehensive loss                                 |       | (189                        | )          | (189                            | )          | —                      |       | 189              |       | (189             | )          |
| (Accumulated  deficit) retained earnings                              |       | 9,732                       |       | (1,273                          | )          | 34,009                      |       | (32,736          | )          | 9,732            |       |
| Total  stockholders’ equity                                      |       | 33,210                      |       | (1,461                          | )          | 76,410                      |       | (74,949          | )          | 33,210           |       |
| Total  liabilities and stockholders’ equity                      |       | $                           | 258,479    |                            | $          | 1,368                       |       | $                | 343,309    |             | $          | (247,404 | ) | $ | 355,752 |   |

 

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**MXENERGYHOLDINGS INC.**

**ConsolidatingStatement of Operations**

**YearEnded June 30, 2009**

**(inthousands)**

** **
|                                                           |       | ** **         |       | **Non-**       |       | ** **       |       |             |       |             |       |
|----------------------------------------------------------------|------------|--------------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
|                                                           |       | **MXenergy**       |       | **Guarantor**  |       | **Guarantor**    |       |             |       |             |       |
|                                                           |       | **Holdings  Inc.** |       | **Subsidiary** |       | **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                           |       | 93                 |       | 733            |       | 59,131           |       | —           |       | 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             |       | 97,288             |       | —         |       | —           |       | (97,288          | )          | —           |       |
| Total  operating expenses                                      |       | 97,381             |       | 310            |       | 114,376          |       | (97,288          | )          | 114,779          |       |
|                                                           |       |               |       |           |       |             |       |             |       |             |       |
| Operating  (loss) profit                                       |       | (97,381            | )          | (300           | )          | (81,752          | )          | 97,288           |       | (82,145          | )          |
| Interest  expense, net                                         |       | 3,693              |       | (5             | )          | 41,617           |       | —           |       | 45,305           |       |
| (Loss)  income before income tax benefit (expense)             |       | (101,074           | )          | (295           | )          | (123,369         | )          | 97,288           |       | (127,450         | )          |
| Income  tax benefit (expense)                                  |       | 873                |       | —         |       | 26,376           |       | —           |       | 27,249           |       |
| Net  (loss) income                                             |       | $                  | (100,201   | )              | $          | (295             | )          | $                | (96,993    | )                | $          | 97,288 |   | $ | (100,201 | ) |

 

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**MXENERGYHOLDINGS INC.**

**ConsolidatingStatement of Operations**

**YearEnded June 30, 2008**

**(dollarsin 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                           |       | 117                              |       | 505                              |       | 61,649                      |       | —           |       | 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             |       | (27,584                          | )          | —                           |       | —                      |       | 27,584           |       | —           |       |
| Total  operating expenses                                      |       | (27,467                          | )          | 115                              |       | 106,413                     |       | 27,584           |       | 106,645          |       |
|                                                           |       |                             |       |                             |       |                        |       |             |       |             |       |
| Operating  profit (loss)                                       |       | 27,467                           |       | (36                              | )          | 76,206                      |       | (27,584          | )          | 76,053           |       |
| Interest  expense, net                                         |       | 3,290                            |       | —                           |       | 30,815                      |       | —           |       | 34,105           |       |
| Income  (loss) before income tax (expense) benefit             |       | 24,177                           |       | (36                              | )          | 45,391                      |       | (27,584          | )          | 41,948           |       |
| Income  tax benefit (expense)                                  |       | 616                              |       | —                           |       | (17,771                     | )          | —           |       | (17,155          | )          |
| Net  income (loss)                                             |       | $                                | 24,793     |                             | $          | (36                         | )          | $                | 27,620     |             | $          | (27,584 | ) | $ | 24,793 |   |

 

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**MXENERGYHOLDINGS INC.**

**ConsolidatingStatement of Operations**

**YearEnded June 30, 2007**

**(dollarsin thousands)**

 
| ** **                                                     | ** ** | **MXenergy  Holdings Inc.** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
|                                                           |       |                        |       |                            |       |                        |       |             |       |             |       |
| Sales  of natural gas and electricity                          |       | $                           | —     |                            | $          | 1,292                       |       | $                | 702,634    |             | $          | — |   | $ | 703,926 |   |
| Cost  of goods sold (excluding depreciation and amortization): |       |                        |       |                            |       |                        |       |             |       |             |       |
| Cost  of natural gas and electricity sold                      |       | —                      |       | 1,267                           |       | 550,761                     |       | —           |       | 552,028          |       |
| Realized  losses from risk management activities               |       | —                      |       | —                          |       | 33,039                      |       | —           |       | 33,039           |       |
| Unrealized  losses from risk management activities             |       | —                      |       | —                          |       | 17,079                      |       | —           |       | 17,079           |       |
|                                                           |       | —                      |       | 1,267                           |       | 600,879                     |       | —           |       | 602,146          |       |
| Gross  profit                                                  |       | —                      |       | 25                              |       | 101,755                     |       | —           |       | 101,780          |       |
|                                                           |       |                        |       |                            |       |                        |       |             |       |             |       |
| Operating  expenses:                                           |       |                        |       |                            |       |                        |       |             |       |             |       |
| General  and administrative expenses                           |       | —                      |       | 339                             |       | 54,177                      |       | —           |       | 54,516           |       |
| Advertising  and marketing expenses                            |       | —                      |       | 4                               |       | 4,040                       |       | —           |       | 4,044            |       |
| Reserves  and discounts                                        |       | —                      |       | —                          |       | 4,725                       |       | —           |       | 4,725            |       |
| Depreciation  and amortization                                 |       | —                      |       | 91                              |       | 27,639                      |       | —           |       | 27,730           |       |
| Equity  in operations of consolidated subsidiaries             |       | 15,326                      |       | —                          |       | —                      |       | (15,326          | )          | —           |       |
| Total  operating expenses                                      |       | 15,326                      |       | 434                             |       | 90,581                      |       | (15,326          | )          | 91,015           |       |
|                                                           |       |                        |       |                            |       |                        |       |             |       |             |       |
| Operating  (loss) profit                                       |       | (15,326                     | )          | (409                            | )          | 11,174                      |       | 15,326           |       | 10,765           |       |
| Interest  expense, net                                         |       | (3,144                      | )          | —                          |       | 36,202                      |       | —           |       | 33,058           |       |
| (Loss)  income before income tax benefit (expense)             |       | (12,182                     | )          | (409                            | )          | (25,028                     | )          | 15,326           |       | (22,293          | )          |
| Income  tax (expense) benefit                                  |       | (1,616                      | )          | —                          |       | 10,111                      |       | —           |       | 8,495            |       |
| Net  (loss) income                                             |       | $                           | (13,798    | )                               | $          | (409                        | )          | $                | (14,917    | )                | $          | 15,326 |   | $ | (13,798 | ) |

 

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**MXENERGYHOLDINGS INC.**

**ConsolidatingStatement of Cash Flows**

**YearEnded****June 30, 2009**

**(inthousands)**

 
| ** **                                                                                                                  | ** ** | **MXenergy**       | ** ** | **Non-  Guarantor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                  | ** ** | **Holdings  Inc.** | ** ** | **Subsidiary**      | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating  activities:**                                                                                                  |       |               |       |                |       |             |       |             |       |             |       |
| Net income  (loss)                                                                                                          |       | $                  | (100,201   | )                   | $          | (295             | )          | $                | (96,993    | )                | $          | 97,288 |   | $ | (100,201 | ) |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating activities:                         |       |               |       |                |       |             |       |             |       |             |       |
| Unrealized  losses from risk management activities                                                                          |       | —             |       | —              |       | 87,575           |       | —           |       | 87,575           |       |
| Stock  compensation expense                                                                                                 |       | —             |       | —              |       | 519              |       | —           |       | 519              |       |
| Depreciation and  amortization                                                                                              |       | —             |       | 31                  |       | 37,544           |       | —           |       | 37,575           |       |
| Deferred tax benefit                                                                                                        |       | —             |       | —              |       | (23,406          | )          | —           |       | (23,406          | )          |
| Non-cash  interest expense, primarily unrealized losses on interest rate swaps and  amortization of deferred financing fees |       | 3,694              |       | —              |       | 12,539           |       | —           |       | 16,233           |       |
| Amortization of  customer contracts acquired                                                                                |       | —             |       | —              |       | (634             | )          | —           |       | (634             | )          |
| Equity in  operations of consolidated subsidiaries                                                                          |       | 97,288             |       | —              |       | —           |       | (97,288          | )          | —           |       |
| Changes in  assets and liabilities, net of effects of acquisitions                                                          |       |               |       |                |       |             |       |             |       |             |       |
| Restricted cash                                                                                                             |       | —             |       | —              |       | (74,781          | )          | —           |       | (74,781          | )          |
| Accounts  receivable                                                                                                        |       | (18,944            | )          | (28                 | )          | 40,103           |       | 18,944           |       | 40,075           |       |
| Natural gas  inventories                                                                                                    |       | —             |       | —              |       | 36,509           |       | —           |       | 36,509           |       |
| Income taxes  receivable                                                                                                    |       | 1,063              |       | —              |       | 1,063            |       | (1,063           | )          | 1,063            |       |
| Option Premiums                                                                                                             |       | —             |       | —              |       | 1,571            |       | —           |       | 1,571            |       |
| Other assets                                                                                                                |       | (1,278             | )          | 350                 |       | (19,581          | )          | —           |       | (20,509          | )          |
| Accounts  payable, accrued commodity purchases and accrued liabilities                                                      |       | (974               | )          | (825                | )          | (46,236          | )          | 1,482            |       | (46,553          | )          |
| Deferred revenue                                                                                                            |       | —             |       | —              |       | (3,164           | )          | —           |       | (3,164           | )          |
| Net cash (used  in) provided by operating activities                                                                        |       | (19,352            | )          | (767                | )          | (47,372          | )          | 19,363           |       | (48,128          | )          |
|                                                                                                                        |       |               |       |                |       |             |       |             |       |             |       |
| **Investing  activities:**                                                                                                  |       |               |       |                |       |             |       |             |       |             |       |
| Long-term  investments                                                                                                      |       | 19,363             |       | —              |       | —           |       | (19,363          | )          | —           |       |
| Purchase of  Catalyst assets                                                                                                |       | —             |       | —              |       | (1,609           | )          | —           |       | (1,609           | )          |
| Customer  acquisition costs                                                                                                 |       | —             |       | 59                  |       | (15,402          | )          | —           |       | (15,343          | )          |
| Purchases of  fixed assets                                                                                                  |       | —             |       | —              |       | (1,001           | )          | —           |       | (1,001           | )          |
| Net cash  provided by (used in) investing activities                                                                        |       | 19,363             |       | 59                  |       | (18,012          | )          | (19,363          | )          | (17,953          | )          |
|                                                                                                                        |       |               |       |                |       |             |       |             |       |             |       |
| **Financing  activities:**                                                                                                  |       |               |       |                |       |             |       |             |       |             |       |
| Proceeds from  Denham Credit Facility                                                                                       |       | —             |       | —              |       | 12,000           |       | —           |       | 12,000           |       |
| Proceeds from  cash advances under Revolving Credit Facility                                                                |       | —             |       | —              |       | 30,000           |       | —           |       | 30,000           |       |
| Repayment of  cash advances under Revolving Credit Facility                                                                 |       | —             |       | —              |       | (30,000          | )          | —           |       | (30,000          | )          |
| Proceeds from  Revolving Credit Facility Bridge Financing)                                                                  |       | —             |       | —              |       | 10,400           |       | —           |       | 10,400           |       |
| Repurchase of  Revolving Credit Facility Bridge Financing                                                                   |       | —             |       | —              |       | (5,000           | )          | —           |       | (5,000           | )          |
| Purchase and  cancellation of treasury shares, net of tax benefit                                                           |       | (11                | )          | —              |       | —           |       | —           |       | (11              | )          |
| Net cash  provided by financing activities                                                                                  |       | (11                | )          | —              |       | 17,400           |       | —           |       | 17,389           |       |
|                                                                                                                        |       |               |       |                |       |             |       |             |       |             |       |
| 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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**MXENERGYHOLDINGS INC.**

**ConsolidatingStatement of Cash Flows**

**YearEnded June 30, 2008**

**(dollarsin thousands)**

 
| ** **                                                                                                                 | ** ** | **MXenergy**       | ** ** | **Non-  Guarantor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                 | ** ** | **Holdings  Inc.** | ** ** | **Subsidiary**      | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating activities:**                                                                                                  |       |               |       |                |       |             |       |             |       |             |       |
| Net income (loss)                                                                                                          |       | $                  | 24,793     |                | $          | (36              | )          | $                | 27,620     |             | $          | (27,584 | ) | $ | 24,793 |   |
| Adjustments to reconcile net income (loss) to net cash (used in)  provided by operating activities:                        |       |               |       |                |       |             |       |             |       |             |       |
| Unrealized losses (gains) from risk management activities                                                                  |       | —             |       | —              |       | (67,168          | )          | —           |       | (67,168          | )          |
| Stock compensation expense                                                                                                 |       | —             |       | —              |       | 1,704            |       | —           |       | 1,704            |       |
| Depreciation and amortization                                                                                              |       | —             |       | 36                  |       | 32,662           |       | —           |       | 32,698           |       |
| Deferred income tax expense (benefit)                                                                                      |       | —             |       | —              |       | 18,187           |       | —           |       | 18,187           |       |
| Non-cash interest expense, primarily unrealized losses on interest  rate swaps and amortization of deferred financing fees |       | 3,290              |       | —              |       | 7,546            |       | —           |       | 10,836           |       |
| Amortization of customer contracts acquired                                                                                |       | —             |       | —              |       | (762             | )          | —           |       | (762             | )          |
| Equity in operations of consolidated subsidiaries                                                                          |       | (27,584            | )          | —              |       | —           |       | 27,584           |       | —           |       |
| Changes in assets and liabilities, net of effects of acquisition:                                                          |       |               |       |                |       |             |       |             |       |             |       |
| Restricted cash                                                                                                            |       | —             |       | —              |       | 463              |       | —           |       | 463              |       |
| Accounts receivable                                                                                                        |       | (98,687            | )          | 93                  |       | (30,274          | )          | 98,687           |       | (30,181          | )          |
| Natural gas inventories                                                                                                    |       | —             |       | —              |       | (7,308           | )          | —           |       | (7,308           | )          |
| Income taxes receivable                                                                                                    |       | (7,173             | )          | —              |       | (7,173           | )          | 7,173            |       | (7,173           | )          |
| Option premiums                                                                                                            |       | —             |       | —              |       | 1,191            |       | —           |       | 1,191            |       |
| Other assets                                                                                                               |       | 1,343              |       | (194                | )          | (540             | )          | —           |       | 609              |       |
| Accounts payable, accrued commodity purchases and accrued liabilities                                                      |       | 20,330             |       | 981                 |       | (3,429           | )          | —           |       | 17,882           |       |
| Deferred revenue                                                                                                           |       | —             |       | —              |       | (4,352           | )          | —           |       | (4,352           | )          |
| Net cash (used in) provided by operating activities                                                                        |       | (83,688            | )          | 880                 |       | (31,633          | )          | 105,860          |       | (8,581           | )          |
|                                                                                                                       |       |               |       |                |       |             |       |             |       |             |       |
| **Investing activities:**                                                                                                  |       |               |       |                |       |             |       |             |       |             |       |
| Long-term investments                                                                                                      |       | 105,860            |       | —              |       | —           |       | (105,860         | )          | —           |       |
| Loan to PS Energy Group Inc. related to purchase of GasKey                                                                 |       | —             |       | —              |       | (8,983           | )          | —           |       | (8,983           | )          |
| Cash received from PS Energy Group, Inc. for repayment of loan                                                             |       | —             |       | —              |       | 8,983            |       | —           |       | 8,983            |       |
| Purchase of GasKey assets                                                                                                  |       | —             |       | —              |       | (12,427          | )          | —           |       | (12,427          | )          |
| Customer acquisition costs                                                                                                 |       | —             |       | (47                 | )          | (19,508          | )          | —           |       | (19,555          | )          |
| Purchases of fixed assets                                                                                                  |       | —             |       | —              |       | (1,959           | )          | —           |       | (1,959           | )          |
| Net cash provided by (used in) investing activities                                                                        |       | 105,860            |       | (47                 | )          | (33,894          | )          | (105,860         | )          | (33,941          | )          |
|                                                                                                                       |       |               |       |                |       |             |       |             |       |             |       |
| **Financing activities:**                                                                                                  |       |               |       |                |       |             |       |             |       |             |       |
| Repayment of Denham Credit Facility                                                                                        |       | (11,040            | )          | —              |       | —           |       | —           |       | (11,040          | )          |
| Repurchase of senior notes                                                                                                 |       | (11,716            | )          | —              |       | (290             | )          | —           |       | (12,006          | )          |
| Issuance of common stock and exercise of warrants and options                                                              |       | 387                |       | —              |       | —           |       | —           |       | 387              |       |
| Issuance of common stock from other executive compensation                                                                 |       | 952                |       | —              |       | —           |       | —           |       | 952              |       |
| Purchase and cancellation of treasury shares, net of tax benefit                                                           |       | (755               | )          | —              |       | —           |       | —           |       | (755             | )          |
| Net cash used in financing activities                                                                                      |       | (22,172            | )          | —              |       | (290             | )          | —           |       | (22,462          | )          |
| Net increase (decrease) in cash                                                                                            |       | —             |       | 833                 |       | (65,817          | )          | —           |       | (64,984          | )          |
| Cash and cash equivalents at beginning of year                                                                             |       | —             |       | 137                 |       | 136,805          |       | —           |       | 136,942          |       |
| Cash and cash equivalents at end of year                                                                                   |       | $                  | —     |                | $          | 970              |       | $                | 70,988     |             | $          | — |   | $ | 71,958 |   |

 

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**MXENERGYHOLDINGS INC.**

**ConsolidatingStatement of Cash Flows**

**YearEnded June 30, 2007**

**(dollarsin thousands)**

 
| ** **                                                                                                                 | ** ** | **MXenergy**       | ** ** | **Non-  Guarantor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                 | ** ** | **Holdings  Inc.** | ** ** | **Subsidiary**      | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                                                                       |       |               |       |                |       |             |       |             |       |             |       |
| **Operating activities:**                                                                                                  |       |               |       |                |       |             |       |             |       |             |       |
| Net (loss) income                                                                                                          |       | $                  | (13,798    | )                   | $          | (409             | )          | $                | (14,917    | )                | $          | 15,326 |   | $ | (13,798 | ) |
| Adjustments to reconcile net loss to net cash (used in) provided by  operating activities:                                 |       |               |       |                |       |             |       |             |       |             |       |
| Unrealized losses from risk management activities                                                                          |       | —             |       | —              |       | 17,079           |       | —           |       | 17,079           |       |
| Stock compensation expense                                                                                                 |       | —             |       | —              |       | 4,539            |       | —           |       | 4,539            |       |
| Depreciation and amortization                                                                                              |       | —             |       | 91                  |       | 27,639           |       | —           |       | 27,730           |       |
| Deferred income tax benefit                                                                                                |       | —             |       | —              |       | (14,449          | )          | —           |       | (14,449          | )          |
| Non-cash interest expense, primarily unrealized losses on interest  rate swaps and amortization of deferred financing fees |       | (3,144             | )          | —              |       | 11,050           |       | —           |       | 7,906            |       |
| Amortization of customer contracts acquired                                                                                |       | —             |       | —              |       | 11,891           |       | —           |       | 11,891           |       |
| Equity in operations of consolidated subsidiaries                                                                          |       | 15,326             |       | —              |       | —           |       | (15,326          | )          | —           |       |
| Changes in assets and liabilities, net of effects of acquisition:                                                          |       |               |       |                |       |             |       |             |       |             |       |
| Restricted cash                                                                                                            |       | —             |       | —              |       | (623             | )          | —           |       | (623             | )          |
| Accounts receivable, net                                                                                                   |       | (208,155           | )          | (147                | )          | 177,964          |       | 33,791           |       | 3,453            |       |
| Natural gas inventories                                                                                                    |       | —             |       | —              |       | (1,712           | )          | —           |       | (1,712           | )          |
| Income taxes receivable                                                                                                    |       | 5,184              |       | —              |       | 5,184            |       | (5184            | )          | 5,184            |       |
| Option premiums                                                                                                            |       | —             |       | —              |       | 1,835            |       | —           |       | 1,835            |       |
| Other assets                                                                                                               |       | (1,627             | )          | (69                 | )          | 703              |       | —           |       | (993             | )          |
| Accounts payable, accrued commodity purchases and accrued liabilities                                                      |       | 14,177             |       | 620                 |       | 41,646           |       | (24,888          | )          | 31,555           |       |
| Deferred revenue                                                                                                           |       | —             |       | —              |       | 9,384            |       | —           |       | 9,384            |       |
| Net cash (used in) provided by operating activities                                                                        |       | (192,037           | )          | 86                  |       | 277,213          |       | 3,719            |       | 88,981           |       |
|                                                                                                                       |       |               |       |                |       |             |       |             |       |             |       |
| **Investing activities:**                                                                                                  |       |               |       |                |       |             |       |             |       |             |       |
| Long-term investments                                                                                                      |       | 3,719              |       | —              |       | —           |       | (3,719           | )          | —           |       |
| Purchase of SESCo assets                                                                                                   |       | —             |       | —              |       | (126,044         | )          | —           |       | (126,044         | )          |
| Deposit and capitalized costs related to purchase of SESCo assets                                                          |       | 3,348              |       | —              |       | —           |       | —           |       | 3,348            |       |
| Purchase of Vantage assets                                                                                                 |       | —             |       | —              |       | (732             | )          | —           |       | (732             | )          |
| Customer acquisition costs                                                                                                 |       | —             |       | (95                 | )          | (7,515           | )          | —           |       | (7,610           | )          |
| Purchases of fixed assets                                                                                                  |       | —             |       | —              |       | (1,882           | )          | —           |       | (1,882           | )          |
| Net cash used in investing activities                                                                                      |       | 7,067              |       | (95                 | )          | (136,173         | )          | (3,719           | )          | (132,920         | )          |
|                                                                                                                       |       |               |       |                |       |             |       |             |       |             |       |
| **Financing activities:**                                                                                                  |       |               |       |                |       |             |       |             |       |             |       |
| Proceeds from Denham Credit Facility                                                                                       |       | 11,040             |       | —              |       | 12,000           |       | —           |       | 23,040           |       |
| Repayment of Denham Credit Facility                                                                                        |       | —             |       | —              |       | (12,000          | )          | —           |       | (12,000          | )          |
| Proceeds from loans                                                                                                        |       | —             |       | —              |       | 6,000            |       | —           |       | 6,000            |       |
| Repayments of loans                                                                                                        |       | —             |       | —              |       | (6,000           | )          | —           |       | (6,000           | )          |
| Debt financing costs                                                                                                       |       | —             |       | —              |       | (9,345           | )          | —           |       | (9,345           | )          |
| Proceeds from bridge loan                                                                                                  |       | —             |       | —              |       | 190,000          |       | —           |       | 190,000          |       |
| Repayment of bridge loan                                                                                                   |       | —             |       | —              |       | (190,000         | )          | —           |       | (190,000         | )          |
| Proceeds from Senior Notes                                                                                                 |       | 174,364            |       | —              |       | 10,886           |       | —           |       | 185,250          |       |
| Repurchase of Senior Notes                                                                                                 |       | —             |       | —              |       | (11,723          | )          | —           |       | (11,723          | )          |
| Issuance of common stock and exercise of warrants and options                                                              |       | 22                 |       | —              |       | —           |       | —           |       | 22               |       |
| Purchase and cancellation of treasury shares, net of tax benefit                                                           |       | (456               | )          | —              |       | —           |       | —           |       | (456             | )          |
| Net cash provided by financing activities                                                                                  |       | 184,970            |       | —              |       | (10,182          | )          | —           |       | 174,788          |       |
| Net (decrease) increase in cash and cash equivalents                                                                       |       | —             |       | (9                  | )          | 130,858          |       | —           |       | 130,849          |       |
| Cash and cash equivalents at beginning of year                                                                             |       | —             |       | 146                 |       | 5,947            |       | —           |       | 6,093            |       |
| Cash and cash equivalents at end of year                                                                                   |       | $                  | —     |                | $          | 137              |       | $                | 136,805    |             | $          | — |   | $ | 136,942 |   |

 

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**ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A(T).  CONTROLS AND PROCEDURES**

 

**Disclosure Controls**

 

We maintain a system ofinternal control over financial reporting and disclosure controls andprocedures designed to ensure that information required to be disclosed inreports filed or submitted under the Securities and Exchange Act of 1934, asamended (the “Exchange Act”), is recorded, processed, summarized and reportedon a timely, accurate and complete basis. Our Board of Directors, operating through its Audit Committee, providesoversight to the financial reporting process.

 

An evaluation wasconducted, with the participation of the Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures 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.

 

In designing andevaluating our disclosure controls and procedures, our management recognizesthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management necessarily is required to apply its judgment in designing andevaluating the controls and procedures. We regularly review our disclosurecontrols and procedures, and our internal control over financial reporting, andmay from time to time make appropriate changes aimed at enhancing theireffectiveness and ensure that our systems evolve with our business.

 

**Internal Control Over FinancialReporting**

 

Our management isresponsible for establishing and maintaining an adequate system of internalcontrol over financial reporting.  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.

 

Our management carriedout an evaluation of the effectiveness of our internal control over financialreporting as of the end of the period covered by this report, with theparticipation of our Chief Executive Officer and Chief Financial Officer.   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.

 

Thematerial weakness relates to certain significant deficiencies that wereidentified by management during our year-end financial statement close processand others that relate to errors identified during the year-end audit for the fiscalyear ended June 30, 2009.  The mostsignificant of these deficiencies relate to:

 

·      Errors inour accounting records that were not properly identified by the normal reviewprocess within our Finance team; and 

·      Revenue recognition errors resulting fromincomplete or inaccurate reports required to reconcile cash receipts todetailed customer records for a few of our markets.

 

These significantdeficiencies resulted in adjustments to our accounting records at June 30,2009 for amounts that related to quarterly and annual periods previouslyreported.  These adjustments were notdeemed by management to be material, individually or in the aggregate, inrelation to our financial position or results of operations, taken as a whole,for any annual or quarterly reporting period during fiscal years 2009 or2008.  However, we have concluded thatthe significant deficiencies, when evaluated in the aggregate, resulted in amaterial weakness in the design and operation of our internal controls overfinancial reporting as of June 30, 2009 such that there was a reasonablepossibility that a material misstatement of our interim or annual financialstatements would not have been prevented or detected on a timely basis.  To remedy this material weakness, we haveidentified certain controls or processes that have been, or will be, put intoplace with the intent to mitigate the risk of potential future misstatementsfrom the identified significant deficiencies.

 

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Other than theremediation steps described above, there have been no changes in our system ofinternal control over financial reporting during the year ended June 30,2009, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

Section 404 of theSarbanes-Oxley Act of 2002 requires management to report on, and externalauditors to attest to, the effectiveness of our internal control structure andprocedures for financial reporting. Management’s report on internal control over financial reporting isincluded on the following page of this Annual Report.

 

This Annual Report doesnot include an attestation report of our registered public accounting firmregarding internal control over financial reporting.  Management’s report was not subject toattestation by our registered public accounting firm pursuant to temporary rules ofthe SEC that permit us to provide only management’s report in this AnnualReport.

 

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**Report of Management on InternalControl over Financial Reporting**

 

October 13, 2009

 

Management is responsiblefor establishing and maintaining an adequate internal control structure andprocedures over financial reporting as defined in Rule 13a-15f of theSecurities and Exchange Act of 1934, as amended, and has completed anassessment of the effectiveness of MXenergy Holdings Inc.’s (the “Company’s”)internal control over financial reporting as of June 30, 2009.  In making this assessment, management usedthe criteria related to internal control over financial reporting described in “Internal Control —Integrated Framework” established by the Committee of Sponsoring Organizationsof the Treadway Commission.

 

In connection with the audit of our financialstatements for the fiscal year ended June 30, 2009, we reported to theAudit Committee of our Board of Directors that certain significant deficienciesin internal controls over financial reporting existed at June 30, 2009that, when evaluated in the aggregate, we concluded to be a material weaknessin the design and operation of internal control over financial reporting at June 30,2009.  Therefore, we have concluded that,as of June 30, 2009, the Company’s internal control over financialreporting was not effective.

 
| /s/ JEFFREY A.  MAYER                                           |   |
|-----------------------------------------------------------------|--------|
| Jeffrey A. Mayer                                                |   |
| President and  Chief Executive Officer                          |   |
| (Principal  executive officer)                                  |   |
|                                                            |   |
|                                                            |   |
| /s/ CHAITU  PARIKH                                              |   |
| Chaitu Parikh                                                   |   |
| Chief Financial  Officer                                        |   |
| (Principal  financial officer and principal accounting officer) |   |

 

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**ITEM 9B. OTHER INFORMATION**

 

None

 

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**PART III.**

 

**ITEM 10. DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE**

 

**ExecutiveOfficers and Directors**

 

On June 30, 2009 andprior to the consummation of the Restructuring, our Board of Directorsconsisted of eight members.  As of September 29,2009, 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.”

 

The names and positionsof our executive officers as of June 30, 2009 and following theconsummation of the Restructuring, and the directors prior to the consummationof the Restructuring are presented in the following table.  Descriptions of the business experience ofour executive officers and directors follow the table.

 
| **Name**                                   | ** ** | **Age** | ** ** | **Position**                                                          |
|--------------------------------------------|------------|---------|------------|-----------------------------------------------------------------------|
|                                       |       |    |       |                                                                  |
| Jeffrey A. Mayer                           |       | 57      |       | President, Chief  Executive Officer and Director                      |
| Steven Murray                              |       | 49      |       | Chief Operating Officer  and Director                                 |
| Carole R. (“Robi”)  Artman-Hodge |       | 58      |       | Executive Vice President  and Director                                |
| Chaitu Parikh                              |       | 40      |       | Vice President and  Chief Financial Officer                           |
| Robert Blake                               |       | 53      |       | Vice President,  Electricity Operations & Regulatory Affairs |
| Gina Goldberg                              |       | 51      |       | Vice President,  Marketing                                            |
| Robert Werner                              |       | 53      |       | Vice President, Supply                                                |
| Daniel Bergstein                           |       | 66      |       | Director                                                              |
| Michael J. Hamilton                        |       | 62      |       | Director                                                              |
| William Landuyt                            |       | 53      |       | Director                                                              |
| Stuart Porter                              |       | 43      |       | Director                                                              |
| John Stewart                               |       | 67      |       | Director                                                              |

 

**JeffreyA. Mayer** is aco-founder of the Company and has been President and Chief Executive Officersince 1999.  He has served as a directorof Holdings since 2005. From 1992 to 1999, Mr. Mayer worked for SempraTrading Corporation, a subsidiary of Sempra Energy (prior to 1997, known as AIGTrading Corporation, a subsidiary of AIG), and served as its Managing Directorin charge of natural gas derivatives marketing. While at Sempra, he worked on the launch of a retail energy marketingjoint venture.  Prior to joining AIG, Mr. Mayerworked at Goldman, Sachs & Co. where he managed the Energy FuturesDepartment from 1989 to 1992, worked in the Futures Services Department from1987 to 1989 and served as Chief Counsel of its J. Aron Commodities Divisionfrom 1984 to 1987.  Mr. Mayerdeveloped the Energy Traders Institute, a seminar on risk management sponsoredby Infocast and heard by dozens of utilities and energy producers in NorthAmerica.  Mr. Mayer has providedconsulting services to Northeast Utilities and the Chicago Board of TradeClearing Corporation.  Mr. Mayerserves as Chairman of the Board of Finance of Westport, CT, an elected officein which he serves as chairman of the town’s municipal pension plans, reviewsbudgets and votes on the tax rate.  Mr. Mayerserved as Chairman of AIG Clearing Corporation, the futures clearing arm of AIGTrading, and Chairman of AIG Securities Corporation, the securities affiliateof AIG Trading.

 

**StevenMurray** has beenChief Operating Officer of the Company since August 2006 and has served asa director of Holdings from 2006 until September 2009.  Previously, Mr. Murray had a 25-yearcareer with the Royal Dutch Shell group of companies, where he most recentlyserved as Chief Executive Officer of SESCo from 2001 to August 2006 and asFirst President and Chief Executive Officer of Shell Trading US Co. from 1998to 2001.  He served as General Manager ofHigher Olefins and Derivatives Businesses of Shell Chemical LP since December 2005,where he oversaw marketing activity in over 50 countries, operations for plantslocated in the United States, the United Kingdom, New Zealand and South Africa,as well as research and development activities in North America and TheNetherlands.  Mr. Murray haspreviously served as Vice Chairman of the National Energy Marketers Associationas well as a member of the board of the Soapers and Detergents Association.

 

**CaroleR. (“Robi”) Artman-Hodge** is a co-founder of the Company, has been Executive Vice President ofthe Company since 1999, and served as Chief Operating Officer from 1999 to August 2006.  She served as a director of****Holdings from 2005 until September 2009.Prior to co-founding the Company, Ms. Artman-

 

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Hodge worked as seniormanaging director of the Project Finance unit of Bank of Ireland from 1997 to1998, senior managing director of Risk Management and Origination for theNatural Resources unit of ING from 1989 to 1996, senior managing director ofthe Commodity Finance and Treasury Marketing unit of Banque Paribas from 1981to 1989 and Assistant Treasurer of the international banking unit of HarrisBank from 1977 to 1981.

 

**ChaituParikh** has beenChief Financial Officer and Vice President of Finance of the Company since July 2004and serves as its Principal Accounting Officer and Assistant Treasurer.  Mr. Parikh served as Vice President ofFinance of the Company from December 2002 to July 2004.  Prior to joining the Company, Mr. Parikhserved as Vice President and Controller of The New Power Company from October 2001to December 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. Parikhholds a CA designation from the Canadian Institute of Chartered Accountants.

 

**RobertBlake** has beenVice President of Electricity Operations & Regulatory Affairs of theCompany since June 2004.  Mr. Blakeserved as Vice President of Customer Operations for the Company from April 2001to May 2004.  Prior to joining theCompany, Mr. Blake served as Manager of United Energy from January 2000to March 2001, and served as Regional Sales Director for Conectiv Energyfrom April 1998 to January 2000. From 1980 to March 1998, Mr. Blake worked for UnitedIlluminating, an electric utility in Connecticut, where he served as Directorof Commercial & Industrial Energy Services.  He has been involved with numerous nationaland regional electricity and energy committees and has held leadership positionswith several regional energy groups, including chairing a NEPOOL task force.

 

**GinaGoldberg**hasserved as Vice President of Sales and Marketing of the Company since February 2004.  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.

 

**RobertWerner** has beenVice President of Supply of the Company since August 2006.  Prior to joining the Company, Mr. Wernerhad a 28-year career with Royal Dutch Shell in energy trading, supply chainmanagement, and pipeline engineering and operations.  From 2002 to 2006, Mr. Werner served asVice President of Supply for SESCo, responsible for natural 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 has anM.B.A. from the University of Houston and a B.S. in Mechanical and AerospaceEngineering from Princeton University.  Mr. Werneris a retired professional engineer in the State of California.

 

**DanielBergstein**servedas a director of Holdings and****theCompany from 2000 until September 2009. Since 1988, Mr. Bergstein has been an attorney in the New Yorkoffice of the international law firm Paul, Hastings, Janofsky & WalkerLLP, where he is the Chairman of the firm’s global Telecommunications and Mediapractice.  Mr. Bergstein is also aco-founder of Cequel III LLC and a director of Cequel Communications, LLC, the8th largest cable company in the United States. He is also an advisory board member of Catalyst Investors I and II, L.P.,two private equity investment funds specializing in telecom and mediainvestments, a board member of SR. Teleperformance, S.A., a Paris stockexchange listed company, and a trustee and board member of The FoundationFighting Blindness.

 

**MichaelJ. Hamilton**waselected as a director of Holdings on March 27, 2008, and currently servesas the Chairman of the Audit Committee.  Mr. Hamiltoncurrently served as Chairman and Chief Executive Officer of MMC Energy, Inc.,a publicly traded merchant electricity generator that owns several generatingunits in California, until September 2009. Previously, Mr. Hamilton was the partner in charge of utility auditand tax at PricewaterhouseCoopers until he retired in 2003.  He served as a senior managing director atFTI Consulting where he specialized in bankruptcy and restructuring work,

 

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primarily in the merchantpower industry.  Mr. Hamilton is acertified public accountant with an additional certification in businessvaluation and is a certified turnaround professional.

 

**WilliamLanduyt**currentlyserves as a director of Holdings and****hasserved as a director of the Company since 2004. Mr. Landuyt currently serves as a member of the AuditCommittee.  Mr. Landuyt is a seniorpartner at Charterhouse Group, Inc., a position he has held since December 2003.  From October 1996 to July 2003, Mr. Landuytserved as the Chief Executive Officer and Chairman of the Board of MillenniumChemicals, Inc.  Mr. Landuytwas previously employed by Hanson Industries where he served as President andChief Executive Officer from June 1995 to October 1996.  Mr. Landuyt held the positions ofFinance Director of Hanson Plc from 1992 to May 1995 and Director ofHanson Plc from 1992 to October 1996. Mr. Landuyt served as Vice President and Chief Financial Officer ofHanson Industries from 1988 to 1992.

 

**StuartPorter**currentlyserves as a director of Holdings and****hasserved as a director of the Company since 2000.   Mr. Porter currently serves as a memberof the Compensation Committee.  Since June 2007,Mr. Porter has been a principal of Denham Capital Management LP, andserves as Chief Investment Officer for the Denham Commodity Partners Funds.  From 2004 to 2007, Mr. Porter was amanaging director at Sowood Capital Management LP and, during that period,managed the Sowood Commodity Partners Funds. From 1996 to July 2004, Mr. Porter was employed as a VicePresident and Portfolio Manager at Harvard Management Company, Inc. wherehe focused on relative value transactions in commodities and structured privatetransactions in the commodity sector.

 

**JohnStewart**served asa director of Holdings and****theCompany from 2000 until September 2009. Mr. Stewart has been an attorney in private practice since1981.  Mr. Stewart serves on theboard of directors of P&B Woodworking and the Amity Art Foundation.  In addition, Mr. Stewart serves as thechairman of the Library Commission of Woodbridge, Connecticut.

 

In connection with theRestructuring, the Company’s Board of Directors was re-organized.  The names of the Company’s current directorsare presented in the following table. Descriptions of the business experience of all new directors follow thetable.

 
| **Name**            | ** ** | **Age** | ** ** | **Position**                                     |
|---------------------|------------|---------|------------|--------------------------------------------------|
|                |       |    |       |                                             |
| Mark Bernstein      |       | 39      |       | Director                                         |
| James Chapman       |       | 47      |       | Director                                         |
| Michael Goldstein   |       | 50      |       | Director                                         |
| Michael J. Hamilton |       | 62      |       | Director                                         |
| William Landuyt     |       | 53      |       | Director                                         |
| Randal T. Maffett   |       | 49      |       | Director                                         |
| Jeffrey A. Mayer    |       | 57      |       | President, Chief  Executive Officer and Director |
| Jonathan Moore      |       | 49      |       | Director                                         |
| Stuart Porter       |       | 43      |       | Director                                         |

 

**Mark Bernstein** is Chief Investment Officer of Private Investment X,LLC, a Houston based private equity firm he founded in 2009 to acquire upstreamassets in the oil and gas industry.  From2006 until 2008, Mr. Bernstein served as Vice President of ConstellationEnergy Group, Inc., where he focused on upstream principal investments. In2005, Mr. Bernstein consulted for Davis Petroleum Corp. regarding theestablishment of the company’s risk management operations and recapitalizationefforts.  From 2002 until 2004, Mr. Bernsteinwas a founding principal of National Bank of Canada’s global risk managementgroup in 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.

 

**James Chapman** is non-executive Vice Chairman of SkyWorks Leasing,LLC, an aircraft management services company based in Greenwich, Connecticut,which he joined in December 2004. From 2003 until 2004, Mr. Chapman was associated with RegimentCapital Advisors, LP, an investment advisor based in Boston specializing inhigh yield investments.  From 2001 until2003, Mr. Chapman acted as a capital markets and strategic planningconsultant with private and public companies, as well as investment advisersand hedge funds, across a range of industries. From 1996 to 2001, Mr. Chapman worked for The Renco

 

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Group, Inc., a multi-billion dollar privatecorporation located in New York City. From 1990 to 1996, Mr. Chapman was a founding principal ofFieldstone Private Capital Group, where he headed the Corporate Finance andHigh Yield Finance Groups.  From 1985 to 1990, Mr. Chapman worked forBankers Trust Company, most recently in their BT Securities capital marketsarea.  Mr. Chapman currently servesas chair of the Company’s Compensation Committee.

 

Mr. Chapman presently serves as a member of theBoard of Directors of AerCap Holdings NV, Scottish Re Group Limited, TembecInc., American Media, Inc., Chrysler LLC and LNR PropertyCorporation.  Mr. Chapman is also aBoard member of several private companies, and serves on the Finance Committeeof The Whitby School in Greenwich.

 

**MichaelGoldstein** has been Senior Managing Director &General Counsel of RBS Sempra Commodities since 1997, where, as chief legalcounsel, he regularly advises on energy and metals commodities and derivativestransactions, product development and marketing, trade contract negotiations,regulatory and compliance issues, litigation and commercial disputes andday-to-day operations (trading, credit and back office issues).  Mr. Goldstein is also a member of thefirm’s Executive Committee.  Prior to hisposition at RBS Sempra Commodities, Mr. Goldstein was the Deputy GeneralCounsel for AIG Trading Group and before that, an Associate with the law firmsof Paul, Weiss, Rifkind, Wharton & Garrison and Milbank, Tweed, Hadleyand McCloy, both located in New York City. Mr. Goldstein is a member of the New York Bar and is an AuthorizedHouse Counsel in Connecticut.  Mr. Goldsteincurrently serves onthe Company’s Compensation Committee.

 

**Randal T. Maffett** founded Sendero Capital Partners, Inc.(“Sendero”) in 2004 and is currently serving as its President and CEO.  Sendero is a private equity firm focused oninvestments, acquisitions and operations in the upstream and midstream sectorsof the oil and gas industry.  From 2002until 2004, Mr. Maffett head of the newly formed North American businessdevelopment group of RWE AG.  When RWE AGdecided to exit the North American energy market in 2003, Mr. Maffett wasretained to liquidate the company’s U.S. assets.  From 1993 until 2002, Mr. Maffett wasresponsible for multiple business units, including Enron North America, EnronInternational, Enron Strategic Ventures and Enron Global Markets, as well asfor Enron’s corporate restructuring group where he focused on restructuringunder-performing assets and companies, both public and private.  During his years at Enron, Mr. Maffettrepresented Enron’s interests on numerous domestic and internationalboards.  From 1989 until 1993, Mr. Maffettmanaged fuel requirements, long-term supply contract negotiation and powermarketing for Altresco Financial, Inc., a company involved powercogeneration.  From 1987 until 1989, Mr. Maffettbuilt and managed the deregulated gas marketing and trading business of LaddPetroleum.  Mr. Maffett currently serveson the Company’s Audit and Compensation Committees.

 

**Jonathan Moore** has served as Executive Vice Presidentat Beowulf Energy since 2008.  BeowulfEnergy is a leading strategic investor in the power industry.   In2006, Mr. Moore founded Juice Energy, Inc., a green-focused energyretailer, where he served as CEO from 2006 until 2008.  From 2002 until 2006, Mr. Moore was COOof Constellation NewEnergy (“Constellation”).  Under Mr. Moore’sleadership, NewEnergy grew into the nation’s largest competitive supplier ofelectricity.  From 1994 until 2002, Mr. Moore worked for The AESCorporation (“AES”), where he was part of the senior management team that ledAES’s acquisition of NewEnergy Ventures, which was one of the first companiesto offer electricity to commercial and industrial customers in deregulatedmarkets.   In 2002, Mr. Moore was part of the team that negotiatedthe sale of AES’s retail electricity business to Constellation Energy Group.  Mr. Moore worked as a transactionalattorney with O’Melveny & Myers in Washington, D.C. from 1988 to 1994.

 

**Committeesof the Board of Directors**

 

Prior to October 2009,our Board of Directors had appointed four committees to help carry out itsduties: the Audit Committee, the Compensation Committee, the Risk OversightCommittee and the Nominating and Governance Committee.

 

The Audit Committee makesrecommendations to the Board of Directors regarding the selection ofindependent auditors, reviews the results and scope of audit and other servicesprovided by our independent auditors and reviews and evaluates our internalaudit and control functions.  Prior tothe consummation of the Restructuring, the Audit Committee consisted of Messrs. Hamilton****(Chair), Bergstein and Landuyt.  The Board of Directors had determined that Messrs. Hamiltonand Landuyt qualified as Audit Committee financial experts within the meaningof the SEC rules.

 

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As of September 29,2009 the Audit Committee consists of Messrs. Hamilton****(Chair), Landuyt and Maffett.  The Board of Directors has determined that Messrs. Hamiltonand Landuyt qualify as financial experts within the meaning of the SEC rules.

 

The CompensationCommittee administers our employee stock and other benefit plans and makesdecisions concerning salaries and incentive compensation for ouremployees.  Prior to the consummation ofthe Restructuring, the Compensation Committee consisted of Messrs. Bergstein(Chair), Landuyt and Porter.  As of October 12,2009 the replacement Compensation Committee consists of Messrs Chapman (Chair),Goldstein, Hamilton, Maffett and Porter.

 

The Nominating andGovernance Committee identifies and recommends qualified individuals to serveas board and committee members, monitors the effectiveness of the Board ofDirectors and its committees and establishes the corporate governanceguidelines for the Company.  Prior to theconsummation of the Restructuring, the Nominating and Governance Committeeconsisted of Messrs. Porter (Chair), Bergstein and Landuyt.  As of October 12, 2009 the replacementmembers of the Nominating and Governance Committee have not been appointed bythe Board of Directors.

 

The Risk OversightCommittee establishes and provides oversight of the Company’s risk managementpolicies.  Prior to consummation of theRestructuring, the Risk Oversight Committee consisted of Messrs. Porter(Chair), Hamilton, Mayer, Murray and Parikh and Ms. Artman-Hodge.  As of October 12, 2009, the replacementmembers of the Risk Oversight Committee have not been appointed by the Board ofDirectors.

 

**Codeof Ethics**

 

We have adopted a Code ofBusiness Conduct and Ethics (the “Code of Ethics”), which applies to ourdirectors, officers and employees that meets the definition of a code of ethicsrequired by Item 406 of Regulation S-K promulgated under the Exchange Act.  The purpose of the Code of Ethics is topromote a culture of honesty, integrity and respect for the law and the peoplewho work at and with the Company.  A copyof the Code of Ethics is available on our website at www.mxholdings.com underthe Corporate Governance link.  We intendto timely disclose any amendments to or waivers of certain provisions of theCode of Ethics applicable to our directors, executive officers, including ourprincipal executive officer, principal financial officer and principalaccounting officer on our website.

 

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**ITEM 11. EXECUTIVE COMPENSATION**

 

**CompensationCommittee Report**

 

Onlyone member (Mr. Stuart Porter) of the Compensation Committee that administered our employee stock and otherbenefit plans and made decisions concerning salaries and incentive compensationfor our employees during fiscal year 2009 transitioned to the new CompensationCommittee appointed by the Board of Directors after the consummation of theRestructuring.  The new CompensationCommittee 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, Mr. Porter recommended to the Board of Directors that theCD&A be included in the Company’s Annual Report.  The remaining members of the currentCompensation Committee have elected to abstain from making such recommendationbecause they were not members of the Compensation Committee during fiscal year2009.

 

*Theinformation contained in the Compensation Committee Report shall not be deemedto be “soliciting material” or to be “filed” with the SEC, nor shall suchinformation be incorporated by reference into any future filings under theSecurities Act or the Exchange Act, except to the extent that we specificallyincorporate it by reference in such filing.*

 

**CompensationDiscussion and Analysis for Named Executive Officers**

 

Asused herein, “named executive officers” refers to our principal executiveofficer (the “CEO”), our chief financial officer and principal financialofficer (the “CFO”) and the three executive officers, other than the CEO andCFO, who were our most highly compensated executive officers for the fiscalyear ended June 30, 2009.

 

***Overview of Our CompensationPhilosophy and Objectives***

 

The compensation of ournamed executive officers is based in part on the terms of our employmentagreements with them and in part on our “pay-for-performance” philosophy onboth an individual and corporate level. We have adopted an approach to compensation that includes a mix ofshort-term and long-term components that are designed to provide properincentives and to reward our senior management team for individual andcorporate performance.

 

Our intent regarding thecompensation of our executive officers is to provide salary and incentivesthat:

 

·               attract and retain talented and experiencedexecutives;

·               motivate our executives to manage our business to meetour short-term and long-term business objectives;

·               motivate the executives to increase shareholder value;and

·               associate compensation with the achievement of certainshort-term and long-term individual and corporate objectives.

 

***Role of Our CompensationCommittee***

 

Our CompensationCommittee is responsible for administering our compensation practices. OurCompensation Committee consists of five directors who are “outside directors”for purposes of Section 162(m) of the Internal Revenue Code, asamended (the “Code”).

 

The CompensationCommittee has been charged by the Board of Directors with the following overallresponsibilities.

 

·                  Approval and evaluation of executive officercompensation policies, plans, and programs;

·                  Approval, oversight and evaluation of equity-basedcompensation plans, including without limitation, stock-based compensationplans, in which officers or employees may participate;

 

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·                  Arrangements with executive officers relating to theiremployment relationships with the Company, including, without limitation,employment agreements and restrictive covenants;

·                  Review and approval of ERISA and other significantemployee benefit plans.

 

The CompensationCommittee considers compensation recommendations from our CEO in determiningexecutive compensation for all of the named executive officers, except in thecase of the CEO.  The CompensationCommittee, at its sole discretion, may accept or deny, in whole or in part, therecommendations of the CEO.  The activitiesof the Compensation Committee are formally reported to the Board of Directors,and board members are encouraged to ask questions and review specific detailsregarding the decisions of the Compensation Committee.  The Board of Directors is not required toapprove the decisions of the Compensation Committee.

 

***Elements of ExecutiveCompensation***

 

The compensation of ournamed executive officers consists primarily of the following components.

 

Annual base salary;

Participation in incentive-based compensation plans;

Participation in equity-based compensation plans;

Awards of any special or supplemental benefits; and

Awards of severance and other termination benefits.

 

We use a mix ofshort-term compensation (annual base salaries and incentive-based compensation)and long-term compensation (equity-based compensation) to provide a totalcompensation structure that is designed to achieve our pay-for-performancephilosophy and other compensation objectives. Although the Compensation Committee has not adopted any formalguidelines for allocating total compensation between short-term and long-termportions, we believe it is important for our executive officers to have someactual or potential equity ownership to provide them with long-term incentivesto improve corporate performance.

 

Our CompensationCommittee members are involved with a portfolio of companies of various sizesfrom which they can assess the appropriateness of executive compensationlevels.  In addition, they are providedwith performance data on named executives and the company’s performance both ofwhich enable thorough decision-making.

 

**AnnualCash Compensation**

 

***Annual Base Salary***

 

We believe that acompetitive base salary is a necessary element of any compensation programdesigned to attract and retain talented and experienced executives, and tomotivate and reward executives for their overall performance.  In general, the base salaries of our namedexecutive officers reflect:

 

·                  the initial base salaries that we negotiated with eachof them at the time of their initial employment or promotion;

·                  consideration of individual performance and increased experience;

·                  any changes in their appointed roles andresponsibilities;

·                  consideration of the individuals contribution towardoverall business performance;

·                  annual cost of living adjustment factors;

·                  results of any benchmarking initiatives to compareexecutive salaries to peer group companies;

·                  experience of the members of the CompensationCommittee with executive salaries at other companies; and

·                  recommendations of the CEO, except in the case of theCEO.

 

The base salaries of ourexecutive officers are reviewed and evaluated for possible adjustment annuallyafter their performance evaluations are completed.

 

Base salaries for ournamed executive officers are summarized in the following table:

 

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| **Name**               | ** ** | **Fiscal Year  2009** | ** ** | **Fiscal Year  2008** | ** ** |
|------------------------|------------|----------------------------|------------|----------------------------|------------|
|                   |       |                       |       |                       |       |
| Jeffrey  Mayer         |       | $                          | 594,825    |                       | $          | 566,500 |   |
| Chaitu Parikh          |       | 421,785                    |       | 401,700                    |       |
| Steven Murray          |       | 486,675                    |       | 463,500                    |       |
| Carole R. Artman-Hodge |       | 390,000                    |       | 390,000                    |       |
| Gina Goldberg          |       | 281,865                    |       | 244,963                    |       |
|                        |            |                            |            |                            |            |  |  |

 

For fiscal year 2009, the CompensationCommittee approved a 5% increase for Messrs. Mayer, Parikh and Murray tokeep their salaries within targeted market levels.  Ms. Goldberg received a 15% salaryincrease to adjust her salary to the targeted market level for herposition.  Ms. Artman-Hodge did notreceive a base salary increase for fiscal year 2009 because her base salaryalready exceeded targeted market levels for her position.

 

***Annual Incentive-BasedCompensation***

 

Our named executiveofficers have the opportunity to receive cash incentive awards tied to ourcompany’s overall performance and their individual performance.

 

Specific performancegoals are established for the payment of annual incentive-based compensation,which are based on the specific individual and business performance factorsdescribed below.  The establishment ofbusiness and individual goals for each named executive officer reinforces twoof our compensation goals: (1) to motivate our named executive officerstoward even higher achievement and business results; and (2) to enable usto attract and retain highly qualified individuals.

 

Individual PerformanceFactors (“IPFs”) represent ratings assigned to the named executive officersthat are based on several performance factors and accomplishment of individualgoals.  IPFs are calculated after asystematic review of each named executive officer, which results in assessmentof specific accomplishments and job skills that generally fall within thefollowing categories: (1) leadership, team management and organizationalskills; (2) primary job responsibilities; (3) judgment anddecision-making; (4) individual attributes; (5) peer relationships;and (6) industry, departmental and company knowledge.  Mr. Mayer is graded by the CompensationCommittee, while the other named executive officers are graded by his or hermanager.  For all named executiveofficers, the overall IPF rating is applied to 25% of their target bonus.  The Compensation Committee reviews andapproves IPFs for the named executive officers.

 

Business PerformanceFactors (“BPFs”)**represent corporate operationalgoals that are considered to be essential to our success for the fiscal year.  BPFs are used to assess corporate performanceand result in a weighted resultant business factor, which is generally assignedto all employees.  For all namedexecutive officers, the BPF rating is applied to 75% of their targetbonus.  The BPFs for the fiscal yearended June 30, 2009 were as follows:

 

·                  34% weighting for achievement of targeted levels ofRCEs at June 30, 2009;

·                  33% weighting for operational excellence, which ismeasured by accomplishment of key business performance factors; and

·                  33% weighting for achievement of Adjusted EBITDA forfiscal year 2009.

 

The weighted resultantbusiness factor is applied to that portion of the named executive officer’sbonus that is subject to the BPF weighting. That cumulative result is then further adjusted for the named executiveofficer’s IPF rating.

 

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Incentive-basedcompensation accrued for the named executive officers for the fiscal year endedJune 30, 2009, subject to final approval by the Compensation Committee, issummarized in the following table.

** **
| ** **             | ** ** | ** **           | ** ** | **Actual Payout** | ** ** |
|------------------------|------------|----------------------|------------|------------------------|------------|
| ** **             | ** ** | **Target % of** | ** ** | **% of**          | ** ** | ** ** | ** ** |
| **Name**               | ** ** | **Salary (1)**  | ** ** | **Salary**             | ** ** | **Amount** | ** ** |
|                   |       |                 |       |                   |       |   |   |
| Jeffrey  Mayer         |       | 100                  | %          | 84                     | %          | $ | 500,545 |   |
| Chaitu Parikh          |       | 100                  | %          | 92                     | %          | 387,198 |   |
| Steven Murray          |       | 100                  | %          | 82                     | %          | 400,000 |   |
| Carole R. Artman-Hodge |       | 100                  | %          | 49                     | %          | 190,944 |   |
| Gina Goldberg          |       | 100                  | %          | 52                     | %          | 147,489 |   |
|                        |            |                      |            |                        |            |  |  |  |

 

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(1)   Based upon employment agreements in place asof June 30, 2009.

 

All named executiveofficers were awarded higher IPFs and BPFs for fiscal year 2009, as comparedwith the prior fiscal year, due to improved operating results.

 

**Equity-BasedCompensation**

 

As of June 30, 2009,we have adopted, by a vote of our shareholders, three separate stock-basedcompensation plans pursuant to which stock options and warrants have beengranted to named executive officers and to other employees.  These stock-based compensation plans aredescribed in the footnotes to the Company’s consolidated financial statementsincluded elsewhere in this Annual Report. Stock-based awards provide our executive officers, employees and otherindividuals who have provided services to us with the right to purchase sharesof our common stock at a fixed exercise price typically for a period of up toten years, subject to continued employment with us.  These plans do not allow us to establish anexercise price that is below fair market value of our common stock on the awarddate.  We have granted stock options asincentive stock options in accordance with Section 422 of the Code, aswell as non-qualified stock options.  Ingeneral, options granted are service-based stock options that have a three yearvesting schedule and a ten year term.  Inthe case of options intended to qualify as incentive stock options, theexercise price for options awarded to employees who own greater than 10% of ourcommon stock as of the date of grant is 110% of the fair market value of ourcommon stock and the term of the option is reduced to 5 years instead of 10years.

 

Stock options are animportant component in our executive compensation program because we havebenefited from dedicated employees who take ownership pride in itsbusiness.  Decisions regarding the amountand timing of stock option awards are made: (1) at the time of theexecutive’s employment; (2) upon periodic review; or (3) on rareoccasions, following a significant event such as an acquisition.

 

The date of grant and thefair market value of the awards are approved by the Compensation Committee.  The fair value of option awards generally areequivalent to the fair value of our common stock.  Because our common stock is not publiclytraded, we obtain an independent valuation of its fair value at June 30 ofeach fiscal year and we calculate its fair value at September 30, December 31and March 31 of each fiscal year using an internally developed model thatapproximates the independent model.

 

The CEO makesrecommendations to the Compensation Committee regarding the award of stockoptions to all named executive officers, which are based on the followingconsiderations:  (1) the officer’sperformance; (2) future responsibilities and expectations of the officerduring the vesting period for the awards; (3) retention concerns, if any; (4) ratingof the officer as a “top performer”; and (5) comparisons with peers withinthe Company.  Any grants are approved bythe Compensation Committee after consideration of the CEO recommendations, itsmembers’ knowledge of market practice, our actual performance for the currentfiscal year and expectations of our future performance.  We do not make decisions regarding equityawards based on the gains or losses from prior equity awards. In addition, wedo not have any formal security ownership requirements.  Generally, stock awards granted to the namedexecutive officers vest over a three-year period with the first vesting periodending on the first anniversary of the date of grant.

 

During the fiscal yearended June 30, 2009, we did not grant any stock option awards to namedexecutive

 

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officers.

 

**Other Compensation**

 

All of our executiveofficers are eligible for benefits generally offered to all employees,including, but not limited to; life, health, disability and dental insuranceand participation in our 401(k) plan. We intend to continue to maintain our current benefits for our executiveofficers, as well as for all of our employees. The Compensation Committee may, in its sole discretion revise, amend oradd to the named executive officer’s benefits and perquisites if deemedadvisable. We do not believe it is necessary for the attraction or retention ofmanagement talent to provide the officers with a substantial amount ofcompensation in the form of perquisites. During fiscal year 2009, in addition to matching the 401(k) contributionsof all of the named executive officers, we made reimbursement payments to Messrs. Mayerand Murray for professional association and club membership fees.

 

Additionally, ourexecutive officers may be awarded special compensation, at the sole discretionof the Compensation Committee, in recognition of extraordinary initiative orefforts related to purchase acquisitions or other transactions.  No such special compensation was awarded toany of our named executives during fiscal year 2009.

 

**Accountingand Tax Considerations**

 

Effective July 1,2006, we adopted, on a prospective basis, the fair market value provisions ofSFAS No. 123R.  Under SFAS No. 123R,the estimated fair value of options granted, net of forfeitures expected tooccur, is amortized as compensation expense over the vesting period of theoptions based on the accelerated attribution method as specified in FASBInterpretation No. 28.  Foradditional information, see Notes 2 and 17 of our audited consolidatedfinancial statements included elsewhere in this Annual Report.

 

We have granted stockoptions as incentive stock options in accordance with Section 422 of theCode subject to the volume limitations contained in the Code.  Generally, the exercise of an incentive stockoption does not trigger any recognition of income or gain to the holder.  If the stock is held until at least one yearafter the date of exercise (or two years from the date the option is granted,whichever is later), all of the gain on the sale of the stock will be capitalgain when recognized for income tax purposes, rather than ordinary income tothe recipient. Consequently, we do not receive a tax deduction.  For stock options that do not qualify asincentive stock options, we are entitled to a tax deduction in the year inwhich the stock options are exercised equal to the spread between the exerciseprice and the fair market value of the stock for which the stock option wasexercised. The holders of the non-qualified stock options are generally taxedon this same amount in the year of exercise.

 

**PostFiscal Year 2009 Actions**

 

***Restructuring Bonuses***

 

In September 2009,the Company paid a total of $750,000 of bonuses to 19 of its executive officersand 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; and Mrs. Artman-Hodge: $30,000.

 

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**Summary Compensation Table**

 

Annual compensation forthe named executive officers is summarized in the following table.

** **
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-**      | ** ** | ** **         | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|---------------|------------|--------------------|------------|------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **equity**    | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Stock**  | ** ** | ** ** | ** ** | **Option** | ** ** | **Incentive** | ** ** | ** **         | ** ** | ** ** | ** ** |
| **Name and Principal**          | ** ** | ** ** | ** ** | ** ** | ** ** | **Awards** | ** ** | **Bonus**  | ** ** | **Awards** | ** ** | **Plan**      | ** ** | **All Other** | ** ** | ** ** | ** ** |
| **Position**                    | ** ** | **Year**   | ** ** | **Salary** | ** ** | **(1)**    | ** ** | **(2)**    | ** ** | **(3)**    | ** ** | **(4)**       | ** ** | **(5)**            | ** ** | **Total**  | ** ** |
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **    | ** ** | ** **         | ** ** | ** ** | ** ** |
| **Jeffrey Mayer**               |       | 2009       |       | $          | 594,825    |       | $          | —     |       | $          | —     |          | $          | 39,664             |       | $          | 519,240    |   | $ | 53,859 |   | $ | 1,207,588 |   |
| *President and Chief Executive* |       | 2008       |       | 566,183    |       | 475,950    |       | —     |       | 92,019     |       | 236,115       |       | 366,564            |       | 1,736,831  |       |
| *Officer*                       |       | 2007       |       | 547,745    |       | —     |       | 250,000    |       | 87,260     |       | 324,500       |       | 13,702             |       | 1,223,207  |       |
|                            |       |       |       |       |       |       |       |       |       |       |       |          |       |               |       |       |       |
| **Chaitu Parikh**               |       | 2009       |       | 421,785    |       | —     |       | —     |       | 87,181     |       | 403,768       |       | 16,936             |       | 929,670    |       |
| *Vice President and Chief*      |       | 2008       |       | 401,475    |       | —     |       | —     |       | 202,261    |       | 202,859       |       | 16,189             |       | 822,784    |       |
| *Financial Officer*             |       | 2007       |       | 389,098    |       | —     |       | 200,000    |       | 191,799    |       | 253,100       |       | 16,500             |       | 1,050,497  |       |
|                            |       |       |       |       |       |       |       |       |       |       |       |          |       |               |       |       |       |
| **Steven Murray**               |       | 2009       |       | 486,675    |       | —     |       | —     |       | 335,313    |       | 419,119       |       | 49,055             |       | 1,290,162  |       |
| *Chief Operating Officer*       |       | 2008       |       | 463,180    |       | —     |       | —     |       | 777,925    |       | 222,406       |       | 37,539             |       | 1,501,050  |       |
|                            |       | 2007       |       | 389,423    |       | —     |       | 150,000    |       | 737,688    |       | 229,800       |       | 43,128             |       | 1,550,039  |       |
|                            |       |       |       |       |       |       |       |       |       |       |       |          |       |               |       |       |       |
| **Carole R. Artman-Hodge**      |       | 2009       |       | 390,000    |       | —     |       | —     |       | 87,181     |       | 207,032       |       | 20,962             |       | 705,175    |       |
| *Executive Vice President*      |       | 2008       |       | 390,000    |       | 475,950    |       | —     |       | 202,261    |       | 180,925       |       | 390,086            |       | 1,639,222  |       |
|                            |       | 2007       |       | 389,662    |       | —     |       | 150,000    |       | 191,799    |       | 159,600       |       | 20,249             |       | 911,310    |       |
|                            |       |       |       |       |       |       |       |       |       |       |       |          |       |               |       |       |       |
| **Gina Goldberg**               |       | 2009       |       | 281,865    |       | —     |       | —     |       | 46,944     |       | 158,408       |       | 15,739             |       | 502,956    |       |
| *Vice President, Marketing*     |       | 2008       |       | 244,963    |       | —     |       | —     |       | 108,910    |       | 117,574       |       | 12,255             |       | 483,702    |       |
|                            |       | 2007       |       | 237,859    |       | —     |       | 25,000     |       | 103,276    |       | 102,900       |       | 13,485             |       | 482,520    |       |
|                                 |            |            |            |            |            |            |            |            |            |            |            |               |            |                    |            |            |            |  |  |  |  |  |  |  |

 

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(1)        In March 2008, theCompensation Committee approved the issuance of 9,500 shares to both Mr. Mayerand Ms. Artman-Hodge.  The fairvalue of these awards was $475,950 for both Mr. Mayer and Ms. Artman-Hodge.

(2)        For Messrs. Mayer andParikh and Ms. Artman-Hodge, the 2007 amount represents a cash bonus paidin recognition of their work in the SESCo Acquisition.  For Mr. Murray, the 2007 amountrepresents a sign-on bonus paid in accordance with his employment agreement.

(3)        This column reflects thecompensation cost of stock options over the requisite service period as definedby SFAS No. 123R and reflects expense recognized in earnings for financialstatement reporting purposes for the fiscal years ended June 30, 2009,2008 and 2007.

(4)        Amounts include annual incentive-basedcompensation awards.  Amounts reflectedare exclusively cash awards.

(5)        For fiscal year 2009, amountsinclude: (1) contributions to the Company-sponsored employee savings planunder Section 401(k) of the Code (Mr. Mayer: $22,000; Mr. Parikh:$16,936; Mr. Murray: $24,230; Ms. Artman-Hodge: $20,962; and Ms. Goldberg:$15,739); (2) club membership fees (Mr. Mayer:  $12,480; Mr. Murray: $24,825); and (3) reimbursementof legal expenses in connection with preparation of employment agreements (Mr. Mayer:$19,379).

 

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**2009 Grants of Plan-Based Awards**

 

Wedid not grant any equity-based compensation awards during the fiscal year endedJune 30, 2009.  Information withrespect to incentive-based compensation awards granted to named executiveofficers for fiscal year 2009 are summarized in the following table.

 
| ** **              | ** ** | **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** | ** ** | **Awards** | ** ** |
|                    |       |                                                                                        |       |                                                       |       |                                            |       |   |   |   |   |
| Jeffrey  Mayer          |       | $                                                                                           | 0          |                                                       | $          | 594,825                                         |       | $ | 713,790 |   | — |   | $ | — |   |
| Chaitu  Parikh          |       | 0                                                                                           |       | 421,785                                                    |       | 506,142                                         |       | — |   | — |   |
| Steven  Murray          |       | 0                                                                                           |       | 486,675                                                    |       | 486,675                                         |       | — |   | — |   |
| Carole  R. Artman-Hodge |       | 0                                                                                           |       | 390,000                                                    |       | 390,000                                         |       | — |   | — |   |
| Gina  Goldberg          |       | 0                                                                                           |       | 140,933                                                    |       | 281,865                                         |       | — |   | — |   |
|                         |            |                                                                                             |            |                                                            |            |                                                 |            |  |  |  |  |  |  |  |  |

 

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(1)          Amounts reflect the range of potential short-termincentive payouts under the Company’s incentive compensation program.  For fiscal year 2009 performance, the actualpayout, as well as the business objectives and percentage of target achieved,are disclosed above under “Annual Cash Incentive Compensation”.

 

**Outstanding Equity Awards at June 30,2009**

 

Outstanding equity awardsfor named executive officers as of June 30, 2009 are summarized in thefollowing table.

 
| ** **             | ** ** | **Option Awards**                                                                    | ** ** |
|------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| **Name**               | ** ** | **Number of  Securities  Underlying  Unexercised  Options/   Warrants  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options/   Warrants  Unexercisable** | ** ** | **Option  Exercise  Price** | ** ** | **Option  Expiration  Date** | ** ** |
|                   |       |                                                                                      |       |   |   |   |   |   |   |
| Jeffrey  Mayer         |       | 48,000                                                                                    |       | — |   | $ | 23.65 |   | 10/19/2009 |   |
| Jeffrey  Mayer         |       | 21,000                                                                                    |       | — |   | 30.25 |   | 6/26/2010 |   |
| Jeffrey  Mayer         |       | 26,000                                                                                    |       | 13,000 |   | 46.83 |   | 11/13/2011 |   |
| Chaitu Parikh          |       | 7,500                                                                                     |       | — |   | 8.00 |   | 3/19/2013 |   |
| Chaitu Parikh          |       | 17,700                                                                                    |       | — |   | 8.00 |   | 1/21/2014 |   |
| Chaitu Parikh          |       | 36,000                                                                                    |       | — |   | 21.50 |   | 10/19/2014 |   |
| Chaitu Parikh          |       | 18,000                                                                                    |       | — |   | 27.50 |   | 6/26/2015 |   |
| Chaitu Parikh          |       | 26,000                                                                                    |       | 13,000 |   | 42.57 |   | 11/13/2016 |   |
| Steven Murray          |       | 100,000                                                                                   |       | 50,000 |   | 42.57 |   | 11/13/2016 |   |
| Carole R. Artman-Hodge |       | 16,550                                                                                    |       | — |   | 8.00 |   | 1/21/2014 |   |
| Carole R. Artman-Hodge |       | 48,000                                                                                    |       | — |   | 21.50 |   | 10/19/2014 |   |
| Carole R. Artman-Hodge |       | 21,000                                                                                    |       | — |   | 27.50 |   | 6/26/2015 |   |
| Carole R. Artman-Hodge |       | 26,000                                                                                    |       | 13,000 |   | 42.57 |   | 11/13/2016 |   |
| Gina Goldberg          |       | 2,500                                                                                     |       | — |   | 25.00 |   | 2/1/2010 |   |
| Gina Goldberg          |       | 2,500                                                                                     |       | — |   | 33.67 |   | 2/1/2011 |   |
| Gina Goldberg          |       | 2,500                                                                                     |       | — |   | 48.74 |   | 2/1/2012 |   |
| Gina Goldberg          |       | 1,200                                                                                     |       | — |   | 8.00 |   | 1/21/2014 |   |
| Gina Goldberg          |       | 12,000                                                                                    |       | — |   | 21.50 |   | 10/19/2014 |   |
| Gina Goldberg          |       | 15,000                                                                                    |       | — |   | 27.50 |   | 6/26/2015 |   |
| Gina Goldberg          |       | 14,000                                                                                    |       | 7,000 |   | 42.57 |   | 11/13/2016 |   |
|                        |            |                                                                                           |            |  |  |  |  |  |  |  |

 

All outstanding equityawards in the table above were cancelled and terminated in connection with theRestructuring.  As of September 30,2009, no named executive officers have any outstanding equity awards.

 

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**OptionExercises**

 

There were no options orwarrants exercised by named executive officers during the fiscal year ended June 30,2009.

 

**PensionBenefits**

 

We do not provide anypost-retirement pension benefits to any of our named executive officers.

 

**NonqualifiedDeferred Compensation Plans**

 

We do not provide anynonqualified deferred compensation programs for any of our named executiveofficers.

 

**Agreements with Named ExecutiveOfficers**

 

***JeffreyMayer Employment Agreement***

 

On February 13,2008, we entered into a new employment agreement with Mr. Mayer (the “MayerAgreement”).  The Mayer Agreementreplaces a previous employment agreement dated April 1, 1999.  The material differences in the MayerAgreement include the following:  (i) reducingboth the initial and automatic renewal terms of the agreement; (ii) providingincreased severance upon a termination without business reasons (and includingthe concept of a constructive termination); (iii) providing for severanceupon a change in control in connection with a qualifying termination; and (iv) includinga Code Section 280G provision, which provides for either a reduction ofpayments or a tax gross-up.  In eachcase, we included these revised terms to reflect market practices, and Mr. Mayer’sincreased responsibilities and authority.

 

The initial term of theMayer Agreement is four years and is automatically renewed for successiveone-year terms unless either party gives the other 180 days’ notice that theMayer Agreement will not be extended or if the Mayer Agreement is otherwiseterminated.  Pursuant to the MayerAgreement, 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 its best efforts to ensure that Mr. Mayer will continue to serve asa member of the Board of Directors.

 

Pursuant to the MayerAgreement, Mr. Mayer will receive an annual base salary of $566,500, whichmay be increased from time to time by the Compensation Committee, at itsdiscretion.  In addition, Mr. Mayer’sannual target bonus shall be equal to 100% of his then current base salary, 75%of which is payable based on achievement of Company and/or individualobjectives specified by the Compensation Committee and 25% of which may beawarded solely at the discretion of the Compensation Committee.  In addition, the Compensation Committee may,in its sole discretion, award Mr. Mayer an additional bonus of up to 20%of his base salary then in effect for extraordinary performance in connectionwith a significant business event.

 

In the event that Mr. Mayeris terminated involuntarily and without “business reasons” (as such term isdefined in the Mayer Agreement, which generally includes “cause” events such asfelony conviction, fraud or insubordination) or a “constructive termination”(as such term is defined in the Mayer Agreement, such as a material reductionin salary or authority or a relocation) occurs, Mr. Mayer will be entitledto receive (i) his then current base salary, any paid time off and anyearned and unpaid target bonus accrued through the date of termination; (ii) alump sum payment equal to the greater of (a) his then current base salaryfor a period of twelve months following the date of termination, or (b) histhen current 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 of Mr. Mayer’sunvested stock options, restricted stock, and other equity awards shall becomefully vested and all stock options that are vested and outstanding (butunexercised) on the date of termination will be cancelled and we will pay to Mr. Mayer,with respect to each option, an amount equal to the excess of the fair marketvalue per share of the shares underlying such option over the exercise price

 

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of such option multipliedby the number of shares underlying such option. In addition, Mr. Mayer’s benefits will continue for the duration ofthe then current employment term.

 

If there is a change incontrol (as such term is defined in the Mayer Agreement) and either aconstructive termination occurs or we terminate Mr. Mayer’s employmentwithout business reasons prior to the expiration of the then current employmentterm, Mr. Mayer will be entitled to receive (i) his then current basesalary, any paid time off, and any earned and unpaid target bonus accruedthrough the date of termination; (ii) a lump sum payment equal to thegreater of (a) two times his then current base salary or (b) his thencurrent base salary for the remainder of the then current employment term; (iii) alump sum payment equal to the greater of (a) 200% of the target bonus forthe fiscal year in which the termination occurs, or (b) 100% of the targetbonus for the fiscal year in which the termination occurs times the number ofyears for the remainder of the then current employment term.  In addition, all of Mr. Mayer’s unvestedstock options, restricted stock, and other equity awards shall become fullyvested.

 

If Mr. Mayer isterminated as a result of death or disability (as such term is defined in theMayer Agreement), he or his representative, as the case may be, is entitled toreceive (i) any accrued and unpaid salary; (ii) any accrued and unpaidtarget bonus for the prior fiscal year; (iii) a pro rata portion of anytarget bonus that he would have otherwise earned during the fiscal year inwhich the termination occurs; and (iv) any accrued and unpaid timeoff.  Mr. Mayer’s outstanding stockoptions, restricted stock, and other equity arrangements shall expire inaccordance with the terms of the applicable award agreements.

 

If Mr. Mayervoluntarily terminates his employment (other than in the case of a constructivetermination), or he is terminated involuntarily for business reasons, he willbe entitled to receive (i) all accrued and unpaid salary, all accrued andunpaid target bonus for the prior fiscal year, and a pro rata portion of anytarget bonus that he would have otherwise earned during the fiscal year inwhich such termination occurs and (ii) all accrued but unpaid time off andother benefits due to him through his termination date under anyCompany-provided or paid plans, policies, and arrangements.  Mr. Mayer’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.

 

If Mr. Mayer’semployment is terminated for any reason, we have the initial right to purchaseall (but not less than all) of the common stock of the Company held by Mr. Mayerby making a written offer within 60 days of termination.  If Mr. Mayer is involuntarily terminatedfor any reason (including a constructive termination) other than for businessreasons, but we do not offer to purchase his shares of common stock within 60days of termination, Mr. Mayer has the right to cause us to repurchase all(but not less than all) of his common stock. The foregoing rights terminate upon an initial public offering of ourcommon stock.

 

The Mayer Agreementprovides that in the event that Mr. Mayer becomes entitled to payments orbenefits that would constitute an “excess parachute payment” within the meaningof Section 280G of the Code, the payment and/or benefits will be reducedto the extent that such payments will not be subject to the excise tax or anyinterest or penalties imposed by Section 4999 of the Code, referred toherein as the 280G Reduction. The 280G Reduction will only take place if Mr. Mayer’s“net after tax benefit” (as defined in the Mayer Agreement) exceeds the netafter tax benefit he would realize if the 280G Reduction were not made. To theextent, the 280G Reduction is unavailable because Mr. Mayer’s net aftertax benefit would be greater if the 280G Reduction were not made, we will pay Mr. Mayera gross up payment in an amount such that after the payment by Mr. Mayerof all taxes (including any income taxes, interest, penalties or any excisetaxes), Mr. Mayer would retain an amount of the gross-up payment equal toseventy-five (75%) of any excise tax imposed upon the payments received by Mr. Mayer.

 

The Mayer Agreement alsocontains restrictive covenants, which apply for the remainder of thethen-current agreement term.  Pursuant tothe restrictive covenants, Mr. Mayer is generally prohibited from (1) owningor providing services for any business competing us for the remainder of theagreement term; (2) inducing employees to leave the our employ or hiringthem (unless the employee contacts Mr. Mayer on an unsolicited basis); (3) solicitingany of our customers, suppliers, licensees or other business relations; or (4) disparagingus, our executive officers, or our directors. In the event that Mr. Mayer violates the provisions of the restrictivecovenants, he will not be entitled to any severance benefits upon a terminationwithout business reasons or upon a constructive termination.  Additionally, upon any such violation, all ofMr. Mayer’s unexercised options, whether vested or unvested, shall becancelled.

 

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***ChaituParikh Employment Agreement***

 

On February 13,2008, we entered into a new employment agreement with Mr. Parikh, as ourChief Financial Officer and Senior Vice President (the “Parikh Agreement”).  The Parikh Agreement replaces a previousemployment agreement dated November 1, 2002.  The material differences in the ParikhAgreement include the following:  (i) providingfor a specified term; (ii) providing increased severance upon atermination without business reasons (and including the concept of aconstructive termination), or upon a change in control in connection with aqualifying termination; and (iii) including a Code Section 280Gprovision, which provides for either a reduction of payments or a taxgross-up.  In each case, we includedthese revised terms to reflect market practices, and Mr. Parikh’sincreased responsibilities and authority.

 

The initial term of theParikh Agreement is three years and is automatically renewed for successiveone-year terms unless either party gives the other 180 days’ notice that theParikh Agreement will not be extended or if the Parikh Agreement is otherwiseterminated.  Pursuant to the ParikhAgreement, Mr. Parikh’s office will be located in our headquarters inStamford, Connecticut, and he will report to the Company’s Board of Directors.

 

Pursuant to the ParikhAgreement, Mr. Parikh will receive an annual base salary of $401,700,which may be increased from time to time by the Compensation Committee, at itsdiscretion.  In addition, Mr. Parikh’sannual target bonus shall be equal to 100% of his then current base salary, 75%of which is payable based on achievement of Company and/or individualobjectives specified by the Compensation Committee and 25% of which may beawarded solely at the discretion of the Compensation Committee.  In addition, the Compensation Committee may,in its sole discretion, award Mr. Parikh an additional bonus of up to 20%of his base salary then in effect for extraordinary performance in connectionwith a significant business event.

 

In the event that Mr. Parikhis terminated involuntarily and without “business reasons” (as such term isdefined in the Parikh Agreement, which generally includes “cause” events suchas felony conviction, fraud or insubordination) or a “constructivelytermination” (as such term is defined in the Parikh Agreement, such as amaterial reduction in salary or authority or a relocation) occurs, Mr. Parikhwill be entitled to receive (i) his then current base salary, any unpaidtime off and any earned and unpaid target bonus accrued through the date oftermination; (ii) a lump sum payment equal to the greater of (a) histhen current base salary for a period of twelve months following the date oftermination, or (b) his then current base salary for the remainder of thethen current employment term; and (iii) a lump sum payment equal to (a) 100%of the target bonus for the fiscal year in which the date of terminationoccurs, (b) 100% of the target bonus for any full fiscal year remainingduring the then applicable employment term, and (c) a pro rata portion of100% of the target bonus being paid for the final fiscal year that beginsduring the then applicable employment term. In addition, all of Mr. Parikh’s unvested stock options, restrictedstock, and other equity awards shall become fully vested and all stock optionsthat are vested and outstanding (but unexercised) on the date of terminationwill be cancelled and we will pay to Mr. Parikh, with respect to eachoption, an amount equal to the excess of the fair market value per share of theshares underlying such option over the exercise price of such option multipliedby the number of shares underlying such option. In addition, Mr. Parikh’s benefits will continue for the durationof the then current employment term.

 

If there is a change incontrol (as such term is defined in the employment agreement) and either aconstructive termination occurs or we terminate Mr. Parikh’s employmentwithout business reasons prior to the expiration of the then current employmentterm, he will be entitled to receive (i) his then current base salary, anypaid time off, and any earned and unpaid target bonus accrued through the dateof termination; (ii) a lump sum payment equal to the greater of (a) twotimes his then current base salary or (b) his then current base salary forthe remainder of the then current employment term; (iii) a lump sumpayment equal to the greater of (a) 200% of the target bonus for thefiscal year in which the termination occurs, or (b) 100% of the targetbonus for the fiscal year in which the termination occurs times the number ofyears for the remainder of the then current employment term.  In addition, all of Mr. Parikh’sunvested stock options, restricted stock, and other equity awards shall becomefully vested.

 

If Mr. Parikh isterminated as a result of death or disability (as such term is defined in theParikh Agreement), he or his representative, as the case may be, will beentitled to receive (i) any accrued and 

 

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unpaid salary; (ii) anyaccrued and unpaid target bonus for a prior fiscal year; (iii) a pro rataportion of any target bonus that he would have otherwise earned during thefiscal year in which the termination occurs; and (iv) any accrued and unpaidpaid time off.  Mr. Parikh’soutstanding stock options, restricted stock, and other equity arrangementsshall expire in accordance with the terms of the applicable award agreements.

 

If Mr. Parikhvoluntarily terminates his employment (other than in the case of a constructivetermination), or he is terminated involuntarily for business reasons, he willbe entitled to receive (i) all accrued and unpaid salary, all accrued andunpaid target bonus for a prior fiscal year, and a pro rata portion of any targetbonus that he would have otherwise earned during the fiscal year in which suchtermination occurs and (ii) all accrued but unpaid paid time off and otherbenefits due to him through his termination date under any Company-provided orpaid plans, policies, and arrangements.  Mr. Parikh’sstock options, restricted stock, and other equity arrangements will ceasevesting immediately and such awards will expire in accordance with the terms ofthe applicable award agreements.

 

If Mr. Parikh’semployment is terminated for any reason, we have the initial right to purchaseall (but not less than all) of the common stock of the Company held by Mr. Parikhby making a written offer within 60 days of termination.  If Mr. Parikh is involuntarilyterminated for any reason (including a constructive termination) other than forbusiness reasons, but we do not offer to purchase his shares of common stock ofthe Company within 60 days of termination, Mr. Parikh has the right tocause us to repurchase all (but not less than all) of his common stock of theCompany.  The foregoing rights terminateupon an initial public offering of our common stock.

 

The Parikh Agreementprovides that in the event that Mr. Parikh becomes entitled to payments orbenefits that would constitute an “excess parachute payment” within the meaningof Section 280G of the Code, the payment and/or benefits will be reducedto the extent that such payments will not be subject to the excise tax or anyinterest or penalties imposed by Section 4999 of the Code, referred toherein as the 280G Reduction. The 280G Reduction will only take place if Mr. Parikh’s“net after tax benefit” (as defined in the Parikh Agreement) exceeds the netafter tax benefit he would realize if the 280G Reduction were not made. To theextent, the 280G Reduction is unavailable because Mr. Parikh’s net aftertax benefit would be greater if the 280G Reduction were not made, we will pay Mr. Parikha gross up payment in an amount such that after the payment by Mr. Parikhof all taxes (including any income taxes, interest, penalties or any excisetaxes), Mr. Parikh would retain an amount of the gross-up payment equal toseventy-five (75%) of any excise tax imposed upon the payments received by Mr. Parikh.

 

The Parikh Agreement alsocontains restrictive covenants, which apply for the remainder of thethen-current agreement term.  Pursuant tothe restrictive covenants, Mr. Parikh is generally prohibited from (1) owningor providing services for any business competing with us for the remainder of theagreement term; (2) inducing employees to leave the our employ or hiringthem (unless the employee contacts Mr. Parikh on an unsolicited basis); (3) solicitingany of our customers, suppliers, licensees or other business relations; or (4) disparagingus, our executive officers, or our directors. In the event that Mr. Parikh violates the provisions of therestrictive covenants, he will not be entitled to any severance benefits upon atermination without business reasons or upon a constructive termination.  Additionally, upon any such violation, all ofMr. Parikh’s unexercised options, whether vested or unvested, shall becancelled.

 

***StevenMurray Employment Agreement***

 

During 2009, we enteredinto discussions with Mr. Murray, our COO, about restating his employmentagreement, dated August 4, 2006 (the “Murray Agreement”).  Theinitial term of the Murray Agreement was three years and such term isautomatically extended for one year at the end of the initial term, unless weor Mr. Murray gives the other party at least 180 days’ advance notice tothe contrary.  On February 6, 2009, weprovided notice to Mr. Murray that the Murray Agreement would expire on theearlier of August 4, 2009 or execution of a new employment agreement. TheMurray Agreement expired on August 4, 2009.

 

Pursuant to the MurrayAgreement, Mr. Murray’s office will be located in our Houston, Texasoffices and he will report to the CEO of the Company. In addition to hisposition as COO, the Murray Agreement provides that Mr. Murray will be amember of the Board of Directors of the Company.

 

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The Murray Agreementprovides that Mr. Murray will receive an annual base salary of $450,000,which may be increased at the Compensation Committee’s discretion.  The Murray Agreement also provides that Mr. Murrayis eligible for an executive bonus, which may be 100% of Mr. Murray’s basesalary.  The target bonus is based on thefollowing: (1) 75% is based on the performance of the Company or Mr. Murrayand (2) 25% is based on the Company’s discretion. Additionally we mayaward Mr. Murray up to 20% of his base salary in connection with hisextraordinary performance with respect to a significant business event,provided that the maximum actual bonus will not exceed 120% of basesalary.  The Murray Agreement alsoprovides that we will grant to Mr. Murray an option to purchase 150,000shares of common stock which will vest in three equal installments over threeyears commencing with the first anniversary of the initial term.

 

On July 31, 2009, weentered into a supplement to the Murray Agreement with Mr. Murray (the “MurraySupplemental Agreement”). Under the Murray Supplemental Agreement, the Companyacknowledged that, as of July 31, 2009, $140,788 of Mr. Murray’s fiscalyear 2008 bonus remains unpaid and Mr. Murray’s fiscal year 2009 bonus hasnot yet been determined, but will be a minimum of $400,000. Mr. Murraywill be entitled to payment for his fiscal year 2008 bonus and fiscal year 2009bonus at the earlier of (i) the earliest date that we are not restrictedunder our debt agreements from paying such bonuses, or (ii) the earliestdate as of which any member of the senior management team receives his or herbonus for fiscal year 2008 or fiscal year 2009. In addition, under the terms ofthe Murray Supplemental Agreement, Mr. Murray agreed to terminate all ofhis options to purchase shares of common stock.

 

In the event Mr. Murray’semployment is terminated prior to an initial public offering of our commonstock, we shall have the right to purchase all of the common stock owned by Mr. Murrayand Mr. Murray shall have the right to require us to purchase all of suchstock, both based upon the fair market value of the common stock.

 

In the event that weterminate Mr. Murray’s employment without a “business reason” (as definedin the Murray Employment Agreement, which generally includes “cause” eventssuch as felony conviction, fraud or insubordination) or a “constructivetermination” (as defined in the Murray Agreement, such as a material reductionin salary or authority or a relocation) occurs Mr. Murray will be entitledto: (1) a lump sum payment equal to the greater of (a) base salaryfor a period of 12 months following the date of termination or (b) basesalary for the remainder of the then-current agreement term; (2) a lumpsum payment equal to (a) 100% of the target bonus for the fiscal year inwhich the termination occurs; (b) 100% of the target bonus for any fullfiscal year remaining during the initial term of the agreement; and (c) apro rata portion of 100% of the target bonus for the final fiscal year thatbegins during the applicable agreement term; (3) Mr. Murray’s unvestedstock options, restricted stock and other equity awards shall become fullyvested, and all vested but outstanding stock options shall be cancelled inconsideration of our payment to Mr. Murray of an amount equal to (x) thefair market value for the shares underlying the option, (y) over theexercise price of such option, (z) multiplied by the number of sharessubject to the option; and (4) any accrued, but unpaid, compensation.

 

If there is a change ofcontrol during the initial term of the Murray Agreement and we terminate Mr. Murray’semployment without business reasons prior to the end of the initial term of theagreement (or within a year following a change of control) prior to the end ofthe initial term of the agreement (or within a year following a change ofcontrol) or a constructive termination occurs, Mr. Murray will be entitledto receive the following: (1) a lump sum payment equal to the greater of (a) basesalary for a period of two years following the date of termination or (b) basesalary for the remainder of the then-current agreement term and (2) a lumpsum payment equal to the greater of (a) 200% of the target bonus for thefiscal year in which the termination occurs; (b) 100% of the target bonusfor any full fiscal year remaining during the initial term of the agreementtimes the number of years for the remainder of the then-current agreement term;(3) Mr. Murray’s unvested stock option, restricted stock and otherequity awards shall become fully vested and (4) any accrued, but unpaid,compensation.

 

In the event oftermination due to disability, Mr. Murray will be entitled to all earned,but unpaid compensation, payments and benefits in accordance with ourdisability policy, the “in the money” value of all vested options, a pro rata portionof any target bonus Mr. Murray would have otherwise earned during thefiscal year in which the disability occurs, and any accrued, but unpaid,compensation.

 

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If Mr. Murrayvoluntarily terminates his employment or we involuntarily terminate hisemployment for business reasons, all equity awards will expire according to theterms of the award agreement, Mr. Murray will receive any accrued, butunpaid, compensation, and Mr. Murray will receive a pro rata portion ofany target bonus that he would have otherwise earned during the fiscal year inwhich his termination occurs.

 

If Mr. Murray’semployment terminates due to death, Mr. Murray’s representative willreceive payments and benefits in accordance with the then applicable plans,policies, or arrangements, all equity awards will expire according to the termsof the award agreement (provided Mr. Murray will be entitled to the “inthe money” value of all vested options), Mr. Murray will receive anyaccrued, but unpaid, compensation, and Mr. Murray will be entitled toreceive a pro rata portion of any target bonus that he would have otherwiseearned during the fiscal year in which his termination occurs.

 

The Murray Agreement alsocontains restrictive covenants, which apply for the remainder of thethen-current agreement term. Pursuant to the restrictive covenants, Mr. Murrayis generally prohibited from (1) owning or providing services for anybusiness competing with us for the remainder of the agreement term; (2) inducingemployees to leave the our employ or hiring them; (3) soliciting any of ourcustomers, suppliers, licensees or other business relations; or (4) disparagingus, our executive officers, or our directors. In the event that Mr. Murray violates the provisions of therestrictive covenants, he will not be entitled to any severance benefits upon atermination without business reasons or upon a constructive termination.  Additionally, upon any such violation, all ofMr. Murray’s unexercised options, whether vested or unvested, shall becancelled.

 

***CaroleR. Artman-Hodge Employment Agreement***

 

We entered into anemployment agreement with Ms. Artman-Hodge dated April 1, 1999 (the “Artman-HodgeAgreement”).  The Artman-Hodge Agreementcommenced on the date of the closing of our initial equity capital transactionin connection with Ms. Artman-Hodge’s employment as our Executive VicePresident and Chief Financial Officer. The initial term of the agreement was five years and is automaticallyextended for successive five-year terms, unless we or Ms. Artman-Hodgegives the other party at least six months’ advance notice to the contrary.

 

The Artman-HodgeAgreement provides that Ms. Artman-Hodge’s base salary may be increasedfrom time to time.  In fiscal year 2007, Ms. Artman-Hodge’sbase salary was $389,662.  TheArtman-Hodge Agreement also provides that Ms. Artman-Hodge is eligible foran annual year-end bonus and to participate in our incentive stock optionplans.  Under a provision of theArtman-Hodge Agreement, Ms. Artman-Hodge also acknowledges and agrees thatas a founder and owner of a substantial equity interest in the Company that sheis subject to the Shareholders Agreement, dated as of May 1, 1999, betweenthe Company and certain shareholders.

 

In the event that weterminate Ms. Artman-Hodge’s employment relationship without “cause” (asdefined in the Artman-Hodge Agreement, which generally means felony conviction,fraud or a material breach of the agreement), Ms. Artman-Hodge will beentitled to a lump sum severance payment of 36 months of her base salary ineffect at the time of her termination plus any unvested warrants, options orother securities awarded to her pursuant to the incentive stock option plans byus. Additionally, she will vest in the pro rata portion of any warrants oroptions that are scheduled to vest on the vesting date next succeeding theeffective date of her termination and forfeit the right to receive allremaining unvested warrants or options. In the event that Ms. Artman-Hodgeterminates her employment or we terminate her employment with cause, Ms. Artman-Hodgewill forfeit her right to receive any unvested options or warrants.

 

The Artman-HodgeAgreement also contains a non-compete provision, which applies during the termof Ms. Artman-Hodge’s employment and for a period of one year thereafter,whether her termination of employment is with or without cause or whether thetermination is initiated by Ms. Artman-Hodge or us. Pursuant to thenon-compete provision, Ms. Artman-Hodge is prohibited from (1) workingwith, or providing services to, any person or entity which was our customer atthe date of cessation of her consulting or employment relationship, as the casemay be or within the twelve-month period preceding such date, or which wascontracted as a client prospect by any representative of the Company within 90days prior to such date of cessation; or (2) soliciting or inducing any ofour employees to leave our employ or to hire or attempt to hire any suchemployee.

 

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For purposes of the Artman-HodgeAgreement, cause means: (i) conviction of, or pleading guilty to, afelony-class crime; (ii) any action taken in bad faith by Ms. Artman-Hodgethat has, or is likely to have, in our reasonable judgment, a material,detrimental effect on the reputation of the Company or its business; (iii) anact of fraud, dishonesty or gross misconduct by Ms. Artman-Hodge; (iv) amaterial breach by Ms. Artman-Hodge of any provision of the Artman-HodgeAgreement that has not been cured within 30 days after our written notice ofsuch breach.

 

***GinaGoldberg Employment Agreement***

 

We entered into anemployment agreement with Ms. Goldberg dated June 13, 2007, referredto 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’s office will be located in the Company’s Stamford,Connecticut offices and she will report to the Chief Operating Officer or theChief Executive Officer of the Company.

 

The Goldberg Agreementprovides that Ms. Goldberg will receive an annual base salary of $238,000.The Goldberg Agreement also provides that Mr. Goldberg is eligible for abonus, which is expected to range from 50 to 100% of Ms. Goldberg’s basesalary.

 

Because the Company hadalready granted warrants and options to Ms. Goldberg prior to June 13,2007, the Goldberg Agreement provides that the terms of the warrants andoptions would not be impacted by the Goldberg Agreement. If the Companyterminates Ms. Goldberg’s employment for business reasons (as definedbelow) all unvested stock options will be forfeited.

 

Additionally, if Ms. Goldberg’semployment is terminated for any reason, the Company shall have the right topurchase all of the common stock owned by Ms. Goldberg, provided that ifthe amount payable to Ms. Goldberg exceeds $200,000, the Company may paythe excess to Ms. Goldberg in quarterly installments with 5% interest overa period of three years and the Company’s obligation to make such payment shallbe suspended during any period that the payment would cause the Company toviolate a loan or similar financial covenant.

 

In the event that theCompany terminates Ms. Goldberg’s employment without a “business reason”(as defined below) or Ms. Goldberg terminates her employment for anyreason 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.

 

For purposes of theGoldberg Agreement, “business reasons” mean: (i) gross negligence, willfulmisconduct or other willful malfeasance in the performance of his duties; (ii) convictionof, or plea of *nolo contendere* to, or writtenadmission of the commission of a felony, or any other criminal offenseinvolving moral turpitude; (iii) any act by Ms. Goldberg involvingmoral turpitude, fraud or misrepresentation with respect to his duties for theCompany or its affiliates; (iv) any act by Ms. Goldberg constitutinga failure to follow the directions of the Chief Executive Officer, the ChiefOperating Officer, or the board of directors, provided written notice of suchfailure is provided to Ms. Goldberg and the failure continues for fivedays after receipt of such notice; and (v) subject to certain conditions, Ms. Goldberg’smaterial breach of the Goldberg Agreement that has not been cured within 30days after written notice of such breach by the board of directors.

 

For purposes of theGoldberg 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, other than a relocation thatis within 30 miles of the Company’s Stamford offices; (ii) there anintentional and material reduction in Ms. Goldberg’s base salary (otherthan a reduction that is consistent with a general reduction for the executivestaff as a group); (iii) there occurs any 

 

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other material breach ofthe 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.

 

The Goldberg Agreementalso contains a non-compete provision, which applies during the term of theGoldberg Agreement and, provided Ms. Goldberg has received a severancepayment for a period of one year after she has received such payment. Pursuantto the non-compete provision, Ms. Goldberg is prohibited from (1) inducingor attempting to induce any employee of the Company or such subsidiary (otherthan his own assistant) to leave the employ of the Company, or in any wayinterfere with the relationship between the Company or any subsidiary and anyemployee thereof; (2) hiring or attempt to hire an employee of the Companyor any subsidiary at any time during the preceding 12 months (unless theemployee contacts Ms. Goldberg on an unsolicited basis); (3) directlyor indirectly inducing or attempting to induce any customer, supplier, licenseeor other business relation of the Company or (4) disparaging the Company,its executive officers, or its directors.

 

**Post-Employment Payments**

 

The following tablesummarizes the payments that we would have been required to make to the namedexecutive officers as of June 30, 2009 as a result of their termination,retirement, disability or death or a change in control of the Company as ofthat date.  The specific circumstancesidentified in the table that would trigger such payments are described in theemployment 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        |       | $                                                                           | 4,345,186  |   | $ | 677,098 |   | $ | 3,750,360 |   | $ | 677,098 |   | $ | 677,098 |   |
| Acceleration  of stock options |       | —                                                                      |       | — |   | — |   | — |   | — |   |
| Health  and life insurance     |       | 33,919                                                                      |       | — |   | — |   | — |   | — |   |
| Continuation  of perquisites   |       | 36,000                                                                      |       | — |   | — |   | — |   | — |   |
| Total  termination benefits    |       | $                                                                           | 4,415,105  |   | $ | 677,098 |   | $ | 3,750,360 |   | $ | 677,098 |   | $ | 677,098 |   |
|                           |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Chaitu Parikh:**             |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash  severance payment        |       | $                                                                           | 2,294,230  |   | $ | 536,793 |   | $ | 1,872,445 |   | $ | 536,793 |   | $ | 536,793 |   |
| Acceleration  of stock options |       | —                                                                      |       | — |   | — |   | — |   | — |   |
| Health  and life insurance     |       | 20,983                                                                      |       | — |   | — |   | — |   | — |   |
| Total  termination benefits    |       | $                                                                           | 2,315,213  |   | $ | 536,793 |   | $ | 1,872,445 |   | $ | 536,793 |   | $ | 536,793 |   |
|                           |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Steven Murray:**             |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash  severance payment        |       | $                                                                           | 1,424,758  |   | $ | 542,660 |   | $ | 1,424,758 |   | $ | 542,660 |   | $ | 542,660 |   |
| Total  termination benefits    |       | $                                                                           | 1,424,758  |   | $ | 542,660 |   | $ | 1,424,758 |   | $ | 542,660 |   | $ | 542,660 |   |
|                           |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Carole Artman-Hodge:**       |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash  severance payment        |       | $                                                                           | 1,190,250  |   | $ | 20,250 |   | $ | 20,250 |   | $ | 20,250 |   | $ | 20,250 |   |
| Total  termination benefits    |       | $                                                                           | 1,190,250  |   | $ | 20,250 |   | $ | 20,250 |   | $ | 20,250 |   | $ | 20,250 |   |
|                           |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Gina Goldberg:**             |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash  severance payment        |       | $                                                                           | 520,600    |   | $ | 238,735 |   | $ | 238,735 |   | $ | 238,735 |   | $ | 238,735 |   |
| Total  Termination benefits    |       | $                                                                           | 520,600    |   | $ | 238,735 |   | $ | 238,735 |   | $ | 238,735 |   | $ | 238,735 |   |

 

**Director Compensation**

 

DuringFiscal year 2009, Michael Hamilton earned the following fees: (1) $40,000for his membership and participation on the Board of Directors and (2) $10,000for his role as Chairman of the Audit Committee.  No otherdirector compensation was earned or paidduring fiscal year 2009.

 

Pursuant to the terms ofthe Company’s Third Amended and Restated Certificate of Incorporation filed inconnection with the Restructuring, as of September 22, 2009, the Companywill pay each independent director a retainer of $35,000 per year and aretainer of $5,000 per year for each committee on which such 

 

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director serves.  In addition, the Company will pay each independentdirector $2,500 for attendance in person at each regular or special boardmeeting or committee meeting and $500 for attendance by telephone at eachregular or special board or committee meeting. The chairman of the Board of Directors, if he or she is an independentdirector, will receive an additional retainer of $5,000 per year.

 

We do not provide anydefined benefit or defined contribution plan benefits to any of ourdirectors.  During the fiscal year ended June 30,2009, we did not grant any stock awards, stock option awards, non-equityincentive compensation or other deferred compensation to any of our directors,nor did we recognize any compensation expense for such awards granted in priorfiscal years.

 

Duringthe fiscal year ended June 30, 2009, Daniel Bergstein provided managementconsulting services to us, for which we recorded $260,000 of expense during theyear.  Refer to “Item 13.  Certain Relationships and RelatedTransactions and Director Independence” for additional information.

 

**Compensation Committee Interlocksand Insider Participation**

 

Messrs. DanielBergstein (Chair), William Landuyt and Stuart Porter served on the CompensationCommittee during the fiscal year ended June 30, 2009.  None of these directors were, during fiscalyear 2009 or previously, officers or employees of Holdings.  The Board of Directors has determined that Messrs. Bergsteinand Landuyt were not independent directors based on the definition ofindependence of the New York Stock Exchange. For more information, refer to “Item 13. Certain Relationships andRelated Transactions, and Director Independence — Independence of Directors.”  During the fiscal year ended June 30,2009, we had no Compensation Committee “interlocks”, meaning that none of ourexecutive officers served as a director or member of the Compensation Committeeof another entity of which an executive officer served as a director or amember of the Compensation Committee of the Company.

 

Messrs. JamesChapman (Chair), Michael Goldstein, Michael Hamilton, Randal Maffett and StuartPorter serve on the Compensation Committee as of September 29, 2009.  None of these directors were, prior to suchdate, or are currently officers or employees of Holdings.  The Board of Directors has not yet determinedwhether such directors are independent. As of September 29, 2009, we have not determined whether any of ourexecutive officers serve as a director or member of the compensation committeeof another entity of which an executive officer serves as a director or a memberof our Compensation Committee.

 

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**ITEM 12. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The following table setsforth, as of September 30, 2009, information with respect to shares ofcommon stock beneficially owned by: (1) each of the named executiveofficers; (2) each director; (3) all executive officers and directorsas a group; and (4) each person known to be the beneficial owner of morethan five percent of our outstanding shares of common stock.

 

The percentages of commonstock and Preferred Stock beneficially owned are reported on the basis of SECregulations 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)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| **Name or Description**                                                                                                      | ** ** | **Number**                     | ** ** | **Percentage  of Total   Common   Stock** | ** ** |
|                                                                                                                                   |       |                           |       |   |   |
| **Executive Officers and Directors:**                                                                                                  |       |                           |       |   |   |
| Jeffrey  Mayer (2)                                                                                                                     |       | 860,830                        |       | 1.6 | % |
| Chaitu  Parikh (3)                                                                                                                     |       | 278,308                        |       | 0.5 |   |
| Steven  Murray                                                                                                                         |       | —                         |       | — |   |
| Carole  R. (“Robi”) Artman-Hodge (4)                                                                                         |       | 434,964                        |       | 0.8 |   |
| Gina  Goldberg (5)                                                                                                                     |       | 776                            |       | — |   |
| Mark  Bernstein                                                                                                                        |       | —                         |       | — |   |
| James  Chapman                                                                                                                         |       | —                         |       | — |   |
| Michael  Goldstein                                                                                                                     |       | —                         |       | — |   |
| Michael  J. Hamilton                                                                                                                   |       | —                         |       | — |   |
| William  Landuyt (6)                                                                                                                   |       | 10,004,705                     |       | 18.4 |   |
| Randal  T. Maffett                                                                                                                     |       | —                         |       | — |   |
| Jonathon  Moore                                                                                                                        |       | —                         |       | — |   |
| Stuart  Porter (7)                                                                                                                     |       | 8,737,436                      |       | 16.1 |   |
| All  directors and executive officers as a group (15 persons) (8)                                                                 |       | 20,317,980                     |       | 37.4 |   |
| **5% Stockholders:**                                                                                                                   |       |                           |       |   |   |
| Charter  Mx LLC (6)   1105 Market Street, Suite 1300, Wilmington, DE 19899                                                        |       | 10,004,705                     |       | 18.4 |   |
| Camulos  Capital LP (9)   Three Landmark Square, Stamford, CT 06901                                                                    |       | 8,976,179                      |       | 16.5 |   |
| Denham  Commodity Partners Fund LP (7)   200 Clarendon Street, 25th Floor, Boston, MA 02116                                            |       | 8,737,436                      |       | 16.1 |   |
| Taconic  Capital Advisors LP (10)   450 Park Avenue, 9th Floor, New York, NY  10022                                               |       | 4,274,570                      |       | 7.9 |   |
| Morgan  Stanley & Co. on behalf of certain funds and accounts, as holders  (11)   2000 Westchester Avenue, Purchase, NY 10577 |       | 4,183,728                      |       | 7.7 |   |
| AIG  Global Investment Corp on behalf of certain funds and accounts, as holders  (12)  2929 Allen Parkway, A37, Houston, TX 77019      |       | 3,960,782                      |       | 7.3 |   |
| Sempra  Energy Trading LLC (13)   600 Washington Blvd., Stamford, CT 06901                                                             |       | 4,002,290                      |       | 7.4 |   |

 

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| (1) |   | The percentage of  beneficial ownership is based on 54,305,112 shares of our common stock  outstanding as of September 30, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Includes 258,339  shares of Class A Common Stock (0.8% of total shares of Class A  Common Stock outstanding) and 31,538 shares of Class C Common Stock  (3.7% of total shares of Class C Common Stock outstanding) received in  connection with the consummation of the Restructuring on September 22,  2009. Also includes 570,953 shares of Class C Common Stock (3.5% of total  shares of Class C Common Stock outstanding) issued to Pequot Enterprises LLC  in connection with the Restructuring. Pequot Enterprises LLC is a limited  liability company owned 23% by Mr. Mayer and for which Mr. Mayer,  as manager, has both voting and disposition power.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (3) |   | Includes 258,339  shares of Class A Common Stock (0.8% of total shares of Class A  Common Stock outstanding) and 19,969 shares of Class C Common Stock  (0.1% of total shares of Class C Common Stock outstanding) received in  connection with the consummation of the Restructuring on September 22,  2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (4) |   | Includes 103,336  shares of Class A Common Stock (0.3% of total shares of Class A  Common Stock outstanding) and 87,399 shares of Class C Common Stock  (0.5% of total shares of Class C Common Stock outstanding) received in  connection with the consummation of the Restructuring on September 22,  2009. Also includes 244,229 shares of Class C Common Stock (1.5% of  total shares of Class C Common Stock outstanding) owned by the Carole R.  Artman-Hodge 2005 7 Yr. GRAT for which Ms. Artman-Hodge has both voting  and disposition power.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (5) |   | Includes 766  shares of Class C Common Stock (less than 0.1% of total shares of  Class C Common Stock outstanding) received in connection with the  consummation of the Restructuring on September 22, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (6) |   | Includes 10,004,705  shares of Class C Common Stock (61.1% of total shares of Class C  Common Stock outstanding) received in connection with the consummation of the  Restructuring on September 22, 2009. All of the shares of Class C  Common Stock are 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. |
| (7) |   | Includes  6,476,722 shares of Class A Common Stock (19.1% of total shares of  Class A Common Stock outstanding) and 2,260,714 shares of Class C  Common Stock (13.8% of total shares of Class C Common Stock outstanding)  received in connection with the consummation of the Restructuring on  September 22, 2009. The shares of Class C Common Stock are held by  Denham Commodity Partners Fund LP. Mr. Porter is a principal of Denham  Capital Management LP and is Chief Investment Officer for Denham Commodity Partners  Fund LP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (8) |   | Includes 7,096,736  shares of Class A Common Stock (20.9% of total shares of Class A  Common Stock outstanding) and 13,221,244 shares of Class C Common Stock  (80.8% of total shares of Class C Common Stock outstanding) received in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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|   |   | connection with  the consummation of the Restructuring on September 22, 2009. Represents  beneficial ownership as a group for all directors and executive officers as  of September 30, 2009 listed in the tables under “Item 10. Directors,  Executive Officers and Corporate Governance — Directors and Executive  Officers.”                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (9)    |   | Includes  8,976,179 shares of Class A Common Stock (26.4% of total shares of  Class A Common Stock outstanding) received by holders of Fixed Rate  Notes due 2014 in connection with the consummation of the Restructuring on  September 22, 2009.                                                                                                                                                      |
| (10)   |   | Includes  4,274,570 shares of Class A Common Stock (12.6% of total shares of  Class A Common Stock outstanding) received by holders of Fixed Rate  Notes due 2014 in connection with the consummation of the Restructuring on  September 22, 2009.                                                                                                                                                      |
| (11)   |   | Includes  4,183,728 shares of Class A Common Stock (12.3% of total shares of  Class A Common Stock outstanding) received by holders of Fixed Rate  Notes due 2014 in connection with the consummation of the Restructuring on  September 22, 2009, which are managed by Morgan Stanley & Co. on  behalf of certain funds and accounts, and over which Morgan Stanley & Co.  has voting control. |
| (12)   |   | Includes  3,960,782 shares of Class A Common Stock (11.7% of total shares of Class A  Common Stock outstanding) received by holders of Fixed Rate Notes due 2014 in  connection with the consummation of the Restructuring on September 22, 2009,  which are managed by AIG Global Investment Corp on behalf of certain funds  and accounts, and over which AIG Global Investment Corp has voting control.             |
| (13)   |   | Includes  4,002,290 shares of Class B Common Stock (100% of total shares of  Class B Common Stock outstanding) received by Sempra Commodity Trading  LLC in connection with the consummation of the Restructuring on  September 22, 2009.                                                                                                                                                               |

 

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**ITEM 13. CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

Our Code of Ethics, whichis posted on our website at www.mxholdings.com, prohibits directors andexecutive officers from engaging in transactions on behalf of the Company witha family member, or with a company with which they or any family member are asignificant owner or associated or employed in a significant role.  Our Audit Committee must review and approvein advance all related party transactions or business or professionalrelationships.  All instances involvingpotential related party transactions or business or professional relationshipsmust be reported to the Company’s inhouse legal counsel, who isresponsible to assess the materiality of the transaction or relationship andelevate the matter to the Audit Committee as appropriate.

 

**Stockholders’Agreement**

 

Prior to theRestructuring, we entered into a Third Amended and Restated Stockholders’Agreement with holders of our common stock and Preferred Stock, whichcontained, among other things, the agreement among our stockholders to restricttheir ability to transfer our stock as well as rights of first refusal,tag-along rights and drag-along rights. Pursuant to the stockholders’agreement, certain of our stockholders had, subject to certain exceptions,preemptive rights on future offerings of equity securities by us. In addition,if we issued or sold shares of our common stock below a certain price, we mustoffer to sell such common stock to certain of our existing stockholders at asimilarly low price.

 

On September 22,2009, in connection with the consummation of our Restructuring, we entered intoa new stockholders agreement (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 of Class CCommon Stock are subject to a right of first refusal in favor of the holders ofshares of Class A Common Stock and holders of shares of Class BCommon Stock.  No shares of Common Stockmay be transferred to competitors of the Company or in any transaction that,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 of 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, (ii) amajority of all authorized directors and (iii) in the case of certainspecified actions, for so long as holders of shares of Class B Common Stockhave the exclusive right to nominate and elect the Class B Director, the Class BDirector.

 

All shares of commonstock will have preemptive rights, subject to certain exceptions, andinformation rights.  If a party that didnot acquire shares of common stock on September 22, 2009 (a “NewShareholder”) acquires, together with its affiliates, or proposes to acquire,from any person (such person, a “Selling Shareholder”), whether through one ora series of transactions, such number of shares of common stock as would resultin the New Shareholder (together with its affiliates) holding a majority of thethen-issued and outstanding shares of common stock, then such New Shareholder,prior to consummating the proposed acquisition, must make a mandatory offer (a “MandatoryOffer”) to purchase the remaining shares of common stock that it does not ownat a price equal to the higher of (a) the highest price per share paid bythe New Shareholder and its affiliates for any shares of common stock acquiredby the New Shareholder and its affiliates during the preceding nine months and (b) thepurchase price per share to be paid by the New Shareholder to the SellingShareholder for the shares of common stock to be acquired by the NewShareholder from the Selling Shareholder.

 

Customary tag-alongrights are provided to all shareholders under the Stockholders Agreement withrespect to sales of shares of common stock representing in the aggregate amajority of the then-issued and outstanding shares of all classes of commonstock, on a fully diluted basis, to a single purchaser, or group of relatedpurchasers, in any transaction or series of related transactions, includingwhere the conditions of a tag-along transfer are satisfied as a result of aMandatory Offer, subject to certain exceptions.

 

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Customary drag-alongrights are provided under the Stockholders Agreement if holders of sharesrepresenting at least 75% of all classes of common stock and holders of sharesrepresenting at least 70% of the Class B Common Stock (until shares of Class BCommon Stock are converted into shares of Class C Common Stock or Class DCommon Stock in connection with an initial public offering (an “IPO”))determine to sell all of the shares of common stock to a person or persons(other than a person that (i) has among its shareholders, members,partners or other equity holders, holders of common stock that collectivelyhold more than 20% of the outstanding shares of common stock, or any affiliatesof such holders, or (ii) is more than 20% owned or controlled, directly orindirectly, by holders of common stock, and other than an affiliate of any ofthe selling stockholders or a group including one or more affiliates of any ofthe selling stockholders) in any transaction, or series of relatedtransactions, that is proposed to be effected on an arms-length basis. The Company will have the right (but not the obligation) to purchase all (butnot less than all) of the shares of Class A Common Stock or Class CCommon Stock held by any holder who has not executed the Stockholders Agreementand who fails to sell its shares of Common Stock to the purchaser in a drag-alongtransaction following a valid exercise of the drag-along rights contained inthe Stockholders Agreement.

 

The following mattersrequire approval of (a) holders of at least 70% of the issued andoutstanding shares of Class A Common Stock, (b) holders of at least70% 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 amendmentaffects the rights of the Class C Common Stock or increases the number ofauthorized shares of Class C Common Stock, holders of at least 70% of the issuedand outstanding shares of Class C Common Stock, and (d) holders of atleast 75% of all issued and outstanding shares of common stock:

 

·                  commencement of a voluntary liquidation, winding up or dissolution ofthe Company or any of its subsidiaries, filing of any petition in bankruptcy orinsolvency or entering into any arrangement for the benefit of creditors,commencing any other proceeding for the reorganization, recapitalization oradjustment or marshalling of the assets or liabilities of the Company or any ofits subsidiaries, or the adoption by the Company or any of its subsidiaries ofa plan with respect to any of the foregoing, or acquiescence or agreement bythe Company or any of its subsidiaries to any of the foregoing commenced orpetitioned for on an involuntary basis;

·                  amendment or modification of the certificate of incorporation or thebylaws of the Company or any subsidiary of the Company;

·                  reorganization of the Company or reclassification of any of itssecurities; and

·                  waiver of preemptive rights in connection with a strategic investmentin the Company by any person.

 

In addition to any voteby holders of common stock required under Delaware law, a vote of holders of atleast 70% of the issued and outstanding shares of Class A Common Stock andholders of at least 70% of the issued and outstanding shares of Class BCommon Stock (in the case of the Class B Common Stock, until shares of Class BCommon Stock are converted into shares of Class C Common Stock or sharesof Class D Common Stock or unless the contemplated merger or othertransaction would, as a condition to the consummation thereof, result in, anddoes result in, the full pay-off and termination of the Commodity SupplyFacility) is required to approve any merger, consolidation or other businesscombination involving the Company or any of its subsidiaries (other thanmergers of wholly owned subsidiaries of the Company with each other or theCompany) or any transaction having the effect (economic or otherwise) of a saleof all or substantially all of the assets of the Company or any of itssubsidiaries (other than transfers of assets of wholly owned subsidiaries ofthe Company to each other or the Company).

 

Pursuant to theStockholders Agreement, the Board of Directors consists of nine directors,elected as follows:

 

·                  Holders of the Class A Common Stockare entitled to nominate and five Class A Directors, at least two of whomshall be independent and qualify as a “financial expert”.

 

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·                  Holders of the Class B Common Stockare entitled to nominate and elect one Class B Director until the sharesof 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 C Common Stockare entitled to nominate and elect two Class C Directors.

·                  The ninth Director will be the Company’spresident and chief executive officer, who initially, shall be Jeffrey A.Mayer.

 

Following the conversionof the shares of Class A Common Stock, Class B Common Stock (ifapplicable) and Class C Common Stock into shares of Class D CommonStock in connection with an IPO, the Board of Directors will consist of suchnumber of directors as will be determined by the Board from time to time, whichnumber will not be less than seven (7) nor more than fifteen (15)directors, and directors will be elected by holders of shares of common stock,voting as a single class at any meeting of the stockholders of the Company atwhich directors are permitted to be elected, or as otherwise permitted underthe Bylaws, provided, however, that, for so long as the shares of Class BCommon Stock are outstanding and have not been converted into shares of Class CCommon Stock or into shares of Class D Common Stock, the Board willinclude one director nominated and elected by holders of shares of Class BCommon Stock.

 

In order to conductmeetings of the Board of Directors, a quorum requires the presence of (i) amajority of the directors then in office, and (ii) prior to the conversionof shares of Class A Common Stock, Class B Common Stock (ifapplicable) and Class C Common Stock into shares of Class D CommonStock, (A) a majority of the Class A Directors then in office, (B) theClass B Director and (C) a Class C Director, provided, however,that if a meeting for which notice has been duly given or waived in accordancewith the Bylaws is adjourned due to the failure of either the Class BDirector or a Class C Director to be in attendance, then so long as noticeis duly delivered of the time and place of the reconvened meeting in accordancewith the Bylaws, the presence of either the Class B Director or a Class CDirector at the reconvened meeting will not be required to establish quorum.

 

**Class A Voting Agreement andClass C Voting Agreement**

 

In addition, on September 22,2009, holders of Class A Common Stock entered into a Class A VotingAgreement (the “Class A Voting Agreement”) that governs their rights tonominate and elect the Class A Directors and certain related matters andholders of Class C Common Stock entered into a Class C VotingAgreement (the “Class C Voting Agreement”) that governs their rights tonominate and elect the Class C Directors and certain related matters.  The Class A Voting Agreement alsoprovides that so long as AIG Global Investment Corp., as the investment advisorfor certain 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 the Class ACommon Stock held by it on September 22, 2009 (after giving effect tostock splits or combinations or similar events), such stockholder shall beentitled to designate one of the Class A Directors.  The fourth andfifth Class A Directors will be designated by AIG, Camulos and Taconic bymutual agreement and will be independent and qualify as “financial experts.”  The Class C Voting Agreement providesthat one of the Class C Directors shall be designated by Charterhouse solong as Charterhouse holds at least 35% of the outstanding shares of Class CCommon Stock held by it on September 22, 2009 (after giving effect tostock splits or combinations or similar events) and who shall initially beWilliam Landuyt, and the other Class C Director shall be designated byDenham so long as Denham holds at least 35% of the outstanding shares of Class CCommon Stock held by it on September 22, 2009 (after giving effect tostock splits or combinations or similar events) and who shall initially beStuart Porter.  If either Charterhouse or Denham loses its right to designatea Class C Director, thereafter such Class C Director position will beelected by a plurality vote of the shares of Class C Common Stock.

 

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**DenhamCredit Facility**

 

Denham is a significantstockholder of the Company.  StuartPorter, a principal of Denham Capital Management LP and Chief InvestmentOfficer for the Denham Commodity Partners Fund, is a director of Holdings.

 

As of June 30, 2009,Denham had extended a $12.0 million line of credit to the Company, which bearsinterest at 9% per annum.  Thetermination date of the Denham Credit Facility was May 19, 2010, at whichtime any outstanding principal balance was to become due.  In December 2007, the agreementgoverning the Denham Credit Facility was amended to allow the Company to drawprincipal until November 14, 2008.

 

In accordance with the September 30,2008 amendment and restatement of the agreement that governs the RevolvingCredit Facility, the Company was required to borrow any available balance underthe Denham Credit Facility prior to November 7, 2008, and to maintain suchbalance outstanding until the Revolving Credit Facility expires on July 31,2009.  In September 2008, theCompany borrowed the entire $12.0 million available line under the DenhamCredit Facility.

 

The Company had $12million and $0 of borrowings outstanding under the Denham Credit Facility at June 30,2009 and 2008, respectively.  The entire outstanding balance under theDenham Credit Facility was repaid by the Company in September 2009 and thefacility was terminated.  Interestexpense related to the Denham Credit Facility was $0.8 million for the fiscalyear ended June 30, 2009.

 

**LegalServices**

 

Paul, Hastings, Janofsky &Walker LLP is a law firm that provides legal services to the Company.  Daniel Bergstein, a former director ofHoldings and significant stockholder of the Company, is senior counsel to PaulHastings.  During the fiscal year ended June 30,2009, Paul Hastings provided the Company with legal services totaling $1.9million.  The Company expects that PaulHastings will continue to provide legal services to the Company in futureperiods.

 

**FinancialAdvisory Services**

 

GCP is a significantstockholder of the Company.** **The Company has a financialadvisory services agreement with Greenhill & Co., LLC (“Greenhill”),an affiliate of GCP.  In April 2008,the Company entered into an engagement letter with Greenhill that amends the GreenhillAgreement by: (1) expanding the definition of the potential transactionspecified in the Greenhill Agreement; and (2) outlining fees associatedwith the occurrence of such a transaction. In November 2008, the April 2008 engagement letter was amendedto: (1) extend the engagement; (2) further expand the definition ofthe potential transaction; and (3) revise the potential fees associatedwith such a transaction.  Greenhillprovided services to the Company totaling approximately $0.3 million related tothe Restructuring.

 

**ManagementFees**

 

As of June 30, 2009, the Company had agreed to pay Denham, CharterMx LLC, a significant stockholder of the Company, and Daniel Bergstein, anaggregate annual fee of $0.9 million, payable in equal quarterly amounts, formanagement consulting services provided to the Company.  Management fees of approximately $0.9 millionrelated to these arrangements were recorded in general and operating expensesduring fiscal year 2009.

 

**Optionsand Warrants Issued to Related Parties**

 

There were no options orwarrants to purchase the Company’s common stock granted to or exercised by anyrelated parties during fiscal year 2009.

 

As of June 30, 2008,Denham held 1,544,736 fully-vested warrants to purchase an equivalent number ofshares of Holdings’ common stock with a weighted average exercise price of$9.79 per share.  These 

 

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warrants were issued inconnection with various previous debt financings.  In September 2008, Denham exercisedthese warrants in a cashless transaction, resulting in the issuance of1,054,982 shares of the Holding’s common stock. Denham forfeited the right to acquire 489,754 shares of Holdings’ commonstock under the warrants as consideration for the cashless exercise.

 

**Fixed Rate Notes due 2014 Held by Holders of Class A Common Stockand Class C Common Stock**

 

Inconnection with the Restructuring, Camulos Capital LP, Denham, Mr. JeffreyMayer, Mr. Chaitu Parikh and Ms. Artman-Hodge, all of whom wereissued shares of Class A Common Stock and Class C Common Stock (referto Item 12 of this Annual Report), also acquired the Company’s Floating RateNotes due 2014.

** **

**Independenceof Directors**

 

The Company is a closelyheld corporation and does not have a class of equity securities listed on anational securities exchange.  TheCompany has adopted the definition of independence of the New York StockExchange.  However, because oursecurities are not listed on a national securities exchange, none of ourdirectors are required to qualify as an independent director.

 

As of June 30, 2009,the Board of Directors determined that under such standard, John Stewart andMichael J. Hamilton were independent directors. Messrs. Mayer or Murray and Ms. Artman-Hodge were not deemedto be independent because they are currently employed by the Company.  Stuart Porter was not an independent directoras a result of his affiliation with Denham, a significant stockholder of theCompany to which the Company also paid a management fee. Daniel Bergstein wasnot an independent director because: (1) he is a senior counsel in the NewYork office of Paul, Hastings, Janofsky & Walker LLP, a law firm thatperforms substantial legal services to the Company on a regular basis; and (2) inJune 2004, he received a finder’s fee in connection with our issuance ofPreferred Stock.  William Landuyt was notan independent director as a result of his affiliation with Charterhouse, asignificant holder of Preferred Stock of the Company to which the Company alsopaid a management fee.

 

As of October 12,2009, the Nominating and Governance Committee had not recommended to the Boardof Directors, for its approval, which members are independent following the Restructuring.However, the Nominating and Governance Committee intends to take such actionshortly following the filing of this Annual Report.

 

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**ITEM 14. PRINCIPAL ACCOUNTANT FEESAND SERVICES**

 

The total fees andexpenses for professional services provided by our independent registeredpublic accounting firm, Ernst & Young LLP are presented in the tablebelow:

 
| ** **          | ** ** | **Year ended June 30,** | ** ** |
|---------------------|------------|----------------------------------------|------------|
| ** **          | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **          | ** ** | **(in thousands)**                | ** ** |
|                |       |                                   |       |   |   |
| Audit  fees         |       | $                                      | 1,418      |   | $ | 1,446 |   |
| Audit-related  fees | ** ** | **—**                             | ** ** | **—** | ** ** |
| Tax  fees           |       | 57                                     |       | 84 |   |
| Total               |       | $                                      | 1,475      |   | $ | 1,530 |   |

 

Audit Fees consistprimarily of: (1) fees billed for the audit of the consolidated financialstatements and review of other financial information included in our AnnualReport on Form 10-K for fiscal years 2009 and 2008; (2) reviews ofour Quarterly Reports on Form 10-Q; (3) review of our compliance withnew U.S. GAAP pronouncements, including SEC regulations; (4) review ouraccounting and reporting methodology for certain specific transactions; and (5) reviewof our financial and other records and issuance of a comfort letter associatedwith the exchange of bonds pursuant to the Restructuring.

 

Tax Fees consist of feesfor tax compliance, tax advice and tax planning.

 

The Audit Committee hasthe responsibility to consider the compatibility of non-audit services providedby its independent auditors with maintaining the auditors’ independence.  There were no such non-audit servicesperformed by the independent auditors during the fiscal year ended June 30,2008.

 

**Pre-ApprovalPolicy**

 

The services performed bythe independent registered public accounting firm during the fiscal year ended June 30,2009 were pre-approved by the Audit Committee, in accordance with the AuditCommittee’s independent auditor pre-approval policy.  This policy describes the permitted audit,audit-related and tax services (collectively, referred to as the disclosurecategories) that the independent registered public accounting firm may performup to a pre-determined dollar limit per project. The policy requires adescription of the material services (referred to as the standard services list)expected to be performed by the independent registered public accounting firmin each of the disclosure categories presented to the audit committee forapproval.

 

Any requests for audit,audit-related and tax services not contemplated on the standard services listor exceeding the pre-determined dollar limit per project must be submitted tothe Audit Committee for specific pre-approval and cannot commence until suchapproval 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**

 

**ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

The following documentsare 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**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                         |     | MXENERGY HOLDINGS INC. |
|------------------------------|----------|-----------------------------|
|                         |     |                        |   |
| Date: October 13,  2009 |     |                        |   |
|                         |     | By:                         | /s/ JEFFREY A.  MAYER |   |
|                         |     |                        | Jeffrey A. Mayer |   |
| * *                     | * * | * *                    | *President  and Chief Executive Officer* |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| **Signatures**           | ** ** | **Title**                                                       | ** **             | **Date**               |
|--------------------------|------------|-----------------------------------------------------------------|------------------------|------------------------|
|                     |       |                                                            |                   |                   |
| /s/ JEFFREY A.  MAYER    |       | Director, President and  Chief Executive Officer                |                   |                   |
| Jeffrey A. Mayer         |       | (Principal Executive  Officer)                                  |                   | October 13,  2009 |
|                     |       |                                                            |                   |                   |
| /s/ CHAITU  PARIKH       |       | Vice President of  Finance and Chief Financial Officer     |                   |                   |
| Chaitu Parikh            |       | (Principal Financial  Officer and Principal Accounting Officer) |                   |                   |
|                     |       |                                                            | October 13,  2009 |
|                     |       |                                                            |                   |                   |
| /s/ MARK  BERNSTEIN      |       | Director                                                        |                   |                   |
| Mark Bernstein           |       |                                                            |                   | October 13,  2009 |
|                     |       |                                                            |                   |                   |
| /s/ JAMES  CHAPMAN       |       | Director                                                        |                   |                   |
| James Chapman            |       |                                                            |                   | October 13,  2009 |
|                     |       |                                                            |                   |                   |
| /s/ MICHAEL  GOLDSTEIN   |       | Director                                                        |                   |                   |
| Michael  Goldstein       |       |                                                            |                   | October 13,  2009 |
|                     |       |                                                            |                   |                   |
| /s/ MICHAEL J.  HAMILTON |       | Director                                                        |                   |                   |
| Michael J.  Hamilton     |       |                                                            |                   | October 13,  2009 |
|                     |       |                                                            |                   |                   |
| /s/ WILLIAM  LANDUYT     |       | Director                                                        |                   |                   |
| William Landuyt          |       |                                                            |                   | October 13,  2009 |
|                     |       |                                                            |                   |                   |
| /s/ RANDAL T.  MAFFETT   |       | Director                                                        |                   |                   |
| Randal T.  Maffett       |       |                                                            |                   | October 13,  2009 |
|                     |       |                                                            |                   |                   |
| /s/ JONATHAN  MOORE      |       | Director                                                        |                   |                   |
| Jonathan Moore           |       |                                                            |                   | October 13,  2009 |
|                     |       |                                                            |                   |                   |
| /s/ STUART  PORTER       |       | Director                                                        |                   |                   |
| Stuart Porter            |       |                                                            |                   | October 13,  2009 |

 

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**Index to Exhibits**

 
| **Exhibit  Number** | ** ** | **Title**                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                 |       | Asset Purchase Agreement, dated as of May 12, 2006, by and  between MXenergy Inc. and Shell Energy Services Company L.L.C. (1)                                                                                                                                                                                                                                                                                                                                 |
| 2.2                 |       | First Amendment to Asset Purchase Agreement and Acknowledgement,  dated as of July 28, 2006, by and between MXenergy Inc. and Shell  Energy Services Company L.L.C. (1)                                                                                                                                                                                                                                                                                   |
| 2.3                 |       | Asset Purchase Agreement, dated November 9, 2007 by and  between PS Energy Group, Inc. and MXenergy Inc. (2)                                                                                                                                                                                                                                                                                                                                              |
| 2.4                 |       | First Amendment to Asset Purchase Agreement and Determination Date  Loan Documents, dated as of December 31, 2007, by and between PS Energy  Group, Inc. and MXenergy Inc. (5)                                                                                                                                                                                                                                                                            |
| 2.5                 |       | Second Amendment to Asset Purchase Agreement and Determination Date  Loan Documents, dated as of January 10, 2008, by and between PS Energy  Group, Inc. and MXenergy Inc. (5)                                                                                                                                                                                                                                                                            |
| 2.6                 |       | Third Amendment to Asset Purchase Agreement and Determination Date  Loan Documents, dated as of December 31, 2007, by and between PS Energy  Group, Inc. and MXenergy Inc. (5)                                                                                                                                                                                                                                                                            |
| 2.7                 |       | Fourth Amendment to Asset Purchase Agreement and Determination Date  Loan Documents, dated as of January 14, 2008, by and between PS Energy  Group, Inc. and MXenergy Inc. (5)                                                                                                                                                                                                                                                                            |
| 2.8                 |       | Fifth Amendment to Asset Purchase Agreement and Determination Date  Loan Documents, dated as of January 15, 2008, by and between PS Energy  Group, Inc. and MXenergy Inc. (5)                                                                                                                                                                                                                                                                             |
| 2.9                 |       | Sixth Amendment to Asset Purchase Agreement and Determination Date  Loan Documents, dated as of January 22, 2008, by and between PS Energy  Group, Inc. and MXenergy Inc. (5)                                                                                                                                                                                                                                                                             |
| 3.1                 |       | Second Amended and Restated Certificate of Incorporation of  MXenergy Holdings Inc. (21)                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2                 |       | Third Amended and Restated Bylaws of MXenergy Holdings Inc. (21)                                                                                                                                                                                                                                                                                                                                                                                                    |
| 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 (21)                                                                                                                                                                                    |
| 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 (21)                                                                                                                                                                                          |
| 4.8                 |       | Form of 13.25% Senior Subordinated Secured Note due 2014  (included in Exhibit 4.7) (21)                                                                                                                                                                                                                                                                                                                                                                  |
| 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 (21)                                                                                                                                                                               |
| 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 (21)                                                                                                                                                                                                                   |
| 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 (21)                                                                                                                                                                                                                                                                                  |
| 9.1                 |       | Class A Voting Agreement, dated as of September 22, 2009,  by and among the holders of Class A common stock party thereto (21)                                                                                                                                                                                                                                                                                                                       |

 

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| 9.2   |   | Class C Voting Agreement, dated as of September 22, 2009,  by and among the holders of Class C common stock party thereto (21)                                                                                                                                                                                                                                    |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1  |   | First Amended and Restated Credit 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,  lenders party thereto and Société Générale, as administrative agent,  syndication agent, lead arranger and sole bookrunner (1) |
| 10.2  |   | First Amendment to First Amended and Restated Credit Agreement,  dated as of April 6, 2007, by and among MXenergy Inc. and MXenergy  Electric Inc., as borrowers, MXenergy Holdings Inc. and certain subsidiaries  thereof, as guarantors, and lenders party thereto (1)                                                                                                    |
| 10.3  |   | Second Amendment to First Amended and Restated Credit Agreement,  dated as of December 17, 2007, by and among MXenergy Inc. and MXenergy  Electric Inc., as borrowers, MXenergy Holdings Inc. and certain subsidiaries  thereof, as guarantors, and lenders party thereto (5)                                                                                               |
| 10.4  |   | Third Amendment to First Amended and Restated Credit Agreement,  dated as of May 12, 2008 but effective as of March 1, 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 (6)                                                             |
| 10.5  |   | Second Amended and Restated Credit Agreement, dated as of September 30,  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)                                                                                                                 |
| 10.6  |   | Waiver Agreement and Amendment No. 1 to Second Amended and  Restated Credit Agreement, dated as of November 7, 2008, by and among  MXenergy Inc. and MXenergy Electric Inc., as borrowers, MXenergy Holdings  Inc. and certain of its subsidiaries, as guarantors, the lenders party  thereto and Société Générale, as administrative agent (10)   |
| 10.7  |   | 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 (11)                                                                                                                  |
| 10.8  |   | 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 (12)                                                                                                  |
| 10.9  |   | 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 (13)                                                                                                   |
| 10.10 |   | 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 (14)                      |
| 10.11 |   | 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 (15)                 |
| 10.12 |   | 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 (16)                            |
| 10.13 |   | 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 (17)        |
| 10.14 |   | 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 (18)             |
| 10.15 |   | 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 (19)              |
| 10.16 |   | Ninth Amendment and Waiver to the Third Amended and Restated Credit  Agreement, dated as                                                                                                                                                                                                                                                                                         |

 

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|   |   | of September 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 (20)                                                                                                                                             |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17  |   | 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)                                                                                                                                               |
| 10.18  |   | 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)                                                                                                                                             |
| 10.19  |   | Amended and Restated Loan Agreement, dated as of November 14,  2003, by and between Denham Commodity Partners Fund LP (formerly known as  Sowood Commodity Partners Fund LP) (as successor to Lathi LLC) and MXenergy  Inc. (1)                                                                                                                                                                                     |
| 10.20  |   | Amended and Restated Security Agreement, dated as of November 14,  2003, by and between Denham Commodity Partners Fund LP (formerly known as  Sowood Commodity Partners Fund LP) (as successor to Lathi LLC) and MXenergy  Inc. (1)                                                                                                                                                                                 |
| 10.21  |   | Amendment No. 1 to Amended and Restated Loan Agreement, dated  as of March 22, 2004, by and between Denham Commodity Partners Fund LP  (formerly known as Sowood Commodity Partners Fund LP) (as successor to Lathi  LLC) and MXenergy Inc. (1)                                                                                                                                                                |
| 10.22  |   | Amendment No. 2 to Amended and Restated Loan Agreement and  Amendment No. 1 to Amended and Restated Security Agreement, dated as of December 19,  2005, by and between Denham Commodity Partners Fund LP (formerly known as  Sowood Commodity Partners Fund LP) (as successor to Lathi LLC) and MXenergy  Inc. (1)                                                                                        |
| 10.23  |   | Amendment No. 3 to Amended and Restated Loan Agreement and  Amendment No. 2 to Amended and Restated Security Agreement, dated as of August 1,  2006, by and between Denham Commodity Partners Fund LP (formerly known as  Sowood Commodity Partners Fund LP) (as successor to Lathi LLC) and MXenergy  Inc. (1)                                                                                           |
| 10.24  |   | Amendment No. 4 to Amended and Restated Loan Agreement, dated  as of January 9, 2008, by and between Denham Commodity Partners Fund LP  and MXenergy Inc. (5)                                                                                                                                                                                                                                                  |
| 10.25  |   | 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) |
| 10.26  |   | 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)          |
| 10.27  |   | 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*****    |
| 10.28  |   | 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 (15)                                                                      |
| 10.29  |   | 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)                                                                                                                                                                                                        |
| 10.30  |   | 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)                                                                                                                                                                                      |
| 10.31  |   | 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 (5)                                                                                                                                                                                 |
| 10.32  |   | 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                                                                                                                                                                                                                                |

 

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|   |   | Société Générale (6)                                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.33  |   | 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 (8)                                                                                                                                                        |
| 10.34  |   | 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 (7)                                                                                                                                                    |
| 10.35  |   | 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 (10)                                                                                                                                                     |
| 10.36  |   | 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 (10)                                                                                                                                                   |
| 10.37  |   | 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 (11)                                                                                                                                                   |
| 10.38  |   | 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 (12)                                                                                                                                                       |
| 10.39  |   | 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 (13)                                                                                                                                                         |
| 10.40  |   | 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  (14)                                                                                                                                  |
| 10.41  |   | 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  (15)                                                                                                                               |
| 10.42  |   | 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 (17)                                                                                                                           |
| 10.43  |   | 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 (18)                                                                                                                         |
| 10.44  |   | 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 (19)                                                                                                                          |
| 10.45  |   | 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 *                                                                                                                        |
| 10.46  |   | 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 (20)                                                                                                          |
| 10.47  |   | Third Amended and Restated Stockholders’ Agreement, dated as of June 25,  2004, by and among MXenergy Inc., Charter Mx LLC, Denham Commodity Partners  Fund LP (formerly known as Sowood Commodity Partners Fund LP) (as successor  to Lathi LLC), Jeffrey A. Mayer, Carole R. Artman-Hodge, Daniel P. Burke and  certain other investors party thereto (1)                       |
| 10.48  |   | First Amendment to Third Amended and Restated Stockholders’  Agreement, dated as of June 9, 2008, by and among MXenergy Inc., Charter  Mx LLC, Denham Commodity Partners Fund LP (formerly known as Sowood Commodity  Partners Fund LP) (as successor to Lathi LLC), and stockholders holding a  majority of the outstanding shares of Voting Stock as of the effective date  (7) |
| 10.49  |   | Transition Services Agreement, dated as of August 1, 2006, by  and between MXenergy Inc. and Shell Energy Services Company L.L.C. (1)                                                                                                                                                                                                                                                  |
| 10.50  |   | Employment Agreement, dated as of February 13, 2008, by and  between MXenergy Inc. and Jeffrey Mayer #(5)                                                                                                                                                                                                                                                                              |
| 10.51  |   | Employment Agreement, dated as of August 4, 2006, by and  between MXenergy Inc. and Steven Murray #(1)                                                                                                                                                                                                                                                                                 |

 

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| 10.52 |   | Supplemental Employment Agreement, dated as of July 31, 2009,  by and between MXenergy Inc. and Steven Murray #*                                                                                                                                                                 |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.53 |   | Employment Agreement, dated as of April 1, 1999, by and between  MXenergy Inc. and Carole R. (“Robi”) Artman- Hodge #(1)                                                                                                                                               |
| 10.54 |   | Employment Agreement, dated as of February 13, 2008, by and  between MXenergy Inc. and Chaitu Parikh #(5)                                                                                                                                                                        |
| 10.55 |   | Employment Agreement, dated as of December 24, 2004, by and  between MXenergy Inc. and Thomas Hartmann #(1)                                                                                                                                                                      |
| 10.56 |   | Employment Agreement, dated as of June 13, 2007, by and  between MXenergy Inc. and Gina Goldberg #(4)                                                                                                                                                                            |
| 10.57 |   | Employment Agreement, dated as of August 14, 2006, by and  between MXenergy Inc. and Robert Werner #(4)                                                                                                                                                                          |
| 10.58 |   | 2001 Stock Option Plan, as amended (1)                                                                                                                                                                                                                                                |
| 10.59 |   | 2003 Stock Option Plan, as amended (1)                                                                                                                                                                                                                                                |
| 10.60 |   | 2006 Equity Incentive Compensation Plan (1)                                                                                                                                                                                                                                           |
| 10.61 |   | Form of Award Agreement under 2001 Stock Option Plan #(1)                                                                                                                                                                                                                        |
| 10.62 |   | Form of Award Agreement under 2003 Stock Option Plan #(1)                                                                                                                                                                                                                        |
| 10.63 |   | Form of Stock Option Award Agreement under 2006 Equity  Incentive Compensation Plan #(1)                                                                                                                                                                                         |
| 10.64 |   | Financial Advisory Agreement, dated as of May 1, 2007, by and  between MXenergy Inc. and Greenhill & Co., LLC (1)                                                                                                                                                       |
| 10.65 |   | ISDA Master Agreement, dated as of September 22, 2009, between  Sempra Energy Trading LLC and MXenergy Inc. (including the schedule thereto)  (21)                                                                                                                               |
| 10.66 |   | ISDA Master Agreement, dated as of September 22, 2009, between  Sempra Energy Trading LLC and MXenergy Electric Inc. (including the schedule  thereto) (21)                                                                                                                      |
| 10.67 |   | 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 (21) |
| 10.68 |   | Stockholders Agreement, dated as of September 22, 2009, by and  among MXenergy Holdings Inc. and the stockholders of MXenergy Holdings Inc.  party thereto (21)                                                                                                                  |
| 10.69 |   | Amendment and Waiver Agreement, dated as of September 22,  2009, among MXenergy Holdings Inc. and the stockholders of MXenergy Holdings  Inc. party thereto (21)                                                                                                                 |
| 10.70 |   | Amendment and Waiver Agreement, dated as of September 22,  2009, among MXenergy Holdings Inc. and the stockholders of MXenergy Holdings  Inc. party thereto (21)                                                                                                                 |
| 10.71 |   | 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 (21)                                                           |
| 10.72 |   | 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 (21)                                          |
| 10.73 |   | Form of Guarantee of 13.25% Senior Subordinated Notes due 2014  (included in Exhibit 4.7) (21)                                                                                                                                                                              |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

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| (1)    |   | Incorporated by reference to the Company’s Registration Statement  on Form S-4 (File No. 333-138425) declared effective on April 30,  2007. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                            |
| (2)    |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on November 14, 2007.                                               |
|   |   |                                                                                                                                                            |
| (3)    |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on August 7, 2007.                                                  |
|   |   |                                                                                                                                                            |
| (4)    |   | Incorporated by reference to the Company’s Annual Report on Form 10-K  for the fiscal year ended June 30, 2007.                                  |
|   |   |                                                                                                                                                            |
| (5)    |   | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q  for the quarterly period ended December 31, 2007.                      |
|   |   |                                                                                                                                                            |
| (6)    |   | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q  for the quarterly period ended March 31, 2008.                         |
|   |   |                                                                                                                                                            |
| (7)    |   | Incorporated by reference to the Company’s Annual Report on Form 10-K  for the fiscal year ended June 30, 2008.                                  |
|   |   |                                                                                                                                                            |
| (8)    |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on August 1, 2008.                                                  |
|   |   |                                                                                                                                                            |
| (9)    |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on October 2, 2008.                                                 |
|   |   |                                                                                                                                                            |
| (10)   |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on November 12, 2008.                                               |
|   |   |                                                                                                                                                            |
| (11)   |   | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q  for the quarterly period ended September 30, 2008.                     |
|   |   |                                                                                                                                                            |
| (12)   |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on March 18, 2009.                                                  |
|   |   |                                                                                                                                                            |
| (13)   |   | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q  for the quarterly period ended March 31, 2009.                         |
|   |   |                                                                                                                                                            |
| (14)   |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on June 3, 2009.                                                    |
|   |   |                                                                                                                                                            |
| (15)   |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on June 12, 2009.                                                   |
|   |   |                                                                                                                                                            |
| (16)   |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on June 18, 2009.                                                   |
|   |   |                                                                                                                                                            |
| (17)   |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on August 3, 2009.                                                  |
|   |   |                                                                                                                                                            |
| (18)   |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on August 18, 2009.                                                 |
|   |   |                                                                                                                                                            |
| (19)   |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on September 3, 2009.                                               |
|   |   |                                                                                                                                                            |
| (20)   |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on September 16, 2009.                                              |
|   |   |                                                                                                                                                            |
| (21)   |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed on September 28, 2009.                                              |

 

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