Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 
| **(Mark One)**                                                                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                      | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                 |
| **For the  fiscal year ended June 30, 2008**                                                                                                                          |
| ** **                                                                                                                                                                 |
| **OR**                                                                                                                                                                     |
|                                                                                                                                                                       |
| **o**                                                                                                                                                                      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                 |
| **For the  transition period  from           to           ** |

 

**CommissionFile Number 333-138425**

 

**MXenergyHoldings Inc.**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **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, includingarea 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 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 | (Do not check if a smaller reporting company) |   | Smaller reporting company o |

 

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.

 

Asof August 31, 2008, there were 3,604,788 shares of the Registrant’s commonstock, par value $0.01 per share, outstanding.

 

Documentsincorporated by reference: **None**

 

 

 

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**MXENERGYHOLDINGS INC.**

**ANNUALREPORT ON FORM 10-K**

**FOR THEFISCAL YEAR ENDED JUNE 30, 2008**

 

**TABLE OFCONTENTS**

 
| **Item  Number** | ** **                                                                                                          | **Page  Number** |
|------------------|---------------------------------------------------------------------------------------------------------------------|------------------|
|             |                                                                                                                |             |
| ** **       | **PART I**                                                                                                     | ** **       |
| 1.               | Business                                                                                                            | 4                |
| 1A.              | Risk Factors                                                                                                        | 18               |
| 1B.              | Unresolved  Staff Comments                                                                                          | 27               |
| 2.               | Properties                                                                                                          | 27               |
| 3.               | Legal  Proceedings                                                                                                  | 27               |
| 4.               | Submission  of Matters to a Vote of Security Holders                                                                | 27               |
|             |                                                                                                                |             |
| ** **       | **PART II**                                                                                                    | ** **       |
| 5.               | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 28               |
| 6.               | Selected  Financial Data                                                                                            | 29               |
| 7.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 34               |
| 7A.              | Quantitative  and Qualitative Disclosures about Market Risk                                                         | 56               |
| 8.               | Financial  Statements and Supplementary Data                                                                        | 58               |
| 9.               | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                               | 104              |
| 9A.              | Controls  and Procedures                                                                                            | 104              |
| 9B.              | Other Information                                                                                                   | 106              |
|             |                                                                                                                |             |
| ** **       | **PART III**                                                                                                   | ** **       |
| 10.              | Directors,  Executive Officers and Corporate Governance                                                             | 107              |
| 11.              | Executive Compensation                                                                                              | 111              |
| 12.              | Security  Ownership of Certain Beneficial Owners and Management and Related  Stockholders Matters                   | 128              |
| 13.              | Certain  Relationships and Related Transactions, and Director Independence                                          | 130              |
| 14.              | Principal  Accountant Fees and Services                                                                             | 132              |
|             |                                                                                                                |             |
| ** **       | **PART IV**                                                                                                    | ** **       |
| 15.              | Exhibits  and Financial Statement Schedules                                                                         | 133              |
|             |                                                                                                                |             |
| ** **       | **SIGNATURES**                                                                                                      | 134              |

 

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**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Somestatements in this Annual Report on Form 10-K, or Annual Report are knownas “forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Forward-looking statements may relate to, among other things:

 

·                  future performance generally;

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

·                  our post-acquisition integration of acquiredbusinesses;

·                  expectations concerning future operations,revenues, gross profit, profitability, attrition, bad debt, interest rates,liquidity and capital resources; and

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

 

Theseforward-looking statements include, but are not limited to, statements aboutour plans, objectives, expectations and intentions and other statementscontained in this Annual Report that are not historical facts.  When used in this Annual Report, the words “expects,”“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similarexpressions are generally intended to identify forward-looking statements.Because these forward-looking statements involve known and unknown risks anduncertainties, there are important factors that could cause actual results,events or developments to differ materially from those expressed or implied bythese forward-looking statements, including our plans, objectives, expectationsand intentions and other factors as set forth in “Item 1A. Risk Factors” andelsewhere in this Annual Report.  Youshould not place undue reliance on such forward-looking statements, which arebased on the information currently available to us and speak only as of thedate on which this Annual Report was filed with the Securities and ExchangeCommission (“SEC”).  We undertake noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise.

 

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**PART I.**

 

**ITEM 1.  BUSINESS**

## *** ***

**Definitions**

 

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

 

Referencesto “MMBtu” refer to a million British thermal units, a standard unit of heatingequivalent measure for natural gas. A unit of heat equal to 1,000,000 Btus, or1 MMBtu, is the thermal equivalent of approximately 1,000 cubic feet of naturalgas. One billion cubic feet, or BCF, of gas is slightly less than1,000,000 MMBtus.

 

Referencesto “MWhr” refer to a million watt hours or a thousand kilowatt hours, which isthe amount of electric energy produced or consumed in a period of time.

 

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

 

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

 

Referencesto “customers” refer to individual accounts served by us.  An individual or business with multipleaccounts will be counted multiple times in our tabulation of customers.  An individual or business may be counted as asingle customer despite having multiple meters in a single location.  Prospective customers that have initiated newservice from us are not included in our customer portfolio until we havecompleted all required processing steps, including credit verification andsharing of appropriate information with the respective LDC. Customers that haveinitiated the process for termination of their service are included in ourcustomer portfolio until the termination has been properly processed andcoordinated with the LDC.

 

**Our Company Overview and History**

 

TheCompany was founded in April 1999, and Holdings was incorporated in thestate of Delaware in 2005 as part of a corporate reorganization.  Headquartered in Stamford, Connecticut, weare an independent energy provider of retail natural gas and electric power toresidential and commercial customers in deregulated markets in the U.S. andCanada.  We are one of a small number ofsuccessful retail energy marketers in the growing deregulated market.  We currently serve natural gas andelectricity customers located in 39 market areas across 14 states in the UnitedStates (the “U.S.”) and in the provinces of Ontario and British Columbia inCanada.

 

Thefollowing map reflects the states in the U.S. and the Canadian provinces wherewe have natural gas and electricity customers.

 

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***Our BusinessSegments and Operations***

 

Ourcore business is the retail sale of natural gas and electricity to end-usecustomers in deregulated markets. Accordingly, our business is classified into two reportable businesssegments: natural gas and electricity. Through these business units, natural gas and electricity are generallysold at contracted prices based on usage by customers. We buy natural gas andelectricity in the wholesale market in time and location specific, bulk orblock quantities at fixed and indexed prices. We sell at variable or market-based prices that, in most cases, changemonthly or at fixed prices for a forward term that generally does not exceedthree years.  In the case of variablesales contracts as well as most mid-market commercial sales, we purchase naturalgas or electricity at the time of sale. In the case of fixed price retail customers, we purchase natural gas andelectricity in advance of sales.  Costsare marked up with a reasonable profit margin. For fixed price sales contracts, the cost of commodity and ancillaryservices is hedged in the forward markets with financial swaps and physicalforward contracts that settle monthly. The natural gas and electricity is then purchased at the time such swapsand forward contracts settle.  Weregularly calculate the amount of commodity required to meet our expectedcustomer deliveries and balance this against the quantity hedged or purchasedfor such customers.  Differences betweenexpected customer deliveries and commodity purchases are managed by adjustingnatural gas deliveries from storage and buying any shortfall or selling anyexcess in the spot market.

 

Thepositive difference between the sales price of natural gas or electricityprovided to customers and the sum of the wholesale cost of commodity supplies,hedging costs, transmission costs and ancillary services costs results in grossprofit.  The natural gas and electricitysold is metered and delivered to customers by the LDCs.  Except in our Georgia natural gas and Texaselectricity markets and for certain of our commercial customers, the localutilities generally provide billing and collection services on our behalf forresidential and small commercial customers. During fiscal year 2008, approximately 44% of our total sales of naturalgas and electricity was within markets where LDCs guarantee customer accountsreceivable.  In the case of our Georgiaand Texas retail markets, we bill 

 

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andcollect directly from customers the price of delivered commodity plus thecharges associated with the local utility’s distribution costs, the latter ofwhich is remitted to such utility.  Inthese two markets, as well as in the case of the commercial customers that webill directly, customer accounts receivable are not guaranteed by theutility.  However, credit checks or otherevidence of ability to pay is required for our customers, and we have the rightto cause the utility to shut-off service in the event of non-payment.  As a result, we have experienced low bad debtlevels.

 

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

 
| ** **  | ** ** | **Fiscal Year Ended June 30,** | ** **  |
|-------------|------------|----------------------------------------------------|-------------|
| ** **  | ** ** | **2008**                                           | ** **  | **2007** | ** ** | **2006** | ** ** |
| ** **  | ** ** | **Sales**                                          | ** **  | **% of  Total** | ** ** | **Sales** | ** ** | **% of  Total** | ** ** | **Sales** | ** ** | **% of  Total** | ** ** |
| ** **  | ** ** | **($ in thousands)**                     | ** **  |
|        |       |                                               |        |   |   |   |   |   |   |   |   |   |   |
| Natural gas | ** ** | **$**                                              | **669,522** | ** ** | **89** |   | $ | 680,811 |   | 97 |   | $ | 345,629 |   | 95 |   |
| Electricity | ** ** | **82,761**                                         | ** **  | **11** |   | 23,115 |   | 3 |   | 16,932 |   | 5 |   |
| Total sales | ** ** | **$**                                              | **752,283** | ** ** | **100** |   | $ | 703,926 |   | 100 |   | $ | 362,561 |   | 100 |   |

 

Naturalgas sales decreased approximately 2% for the fiscal year ended June 30,2008, as compared with the prior fiscal year, due primarily to:

 

·                 customer attrition, which was partiallyoffset by new customer growth; and

·                 warmer-than-normal weather in Georgia, whichis our largest natural gas market.

 

Thesefactors were partially offset by a generally higher selling price per naturalgas MMBtus sold.

 

Growingelectricity sales over the past three fiscal years resulted primarily from:

 

·                 higher volumes of electricity MWhrs soldresulting from strong organic growth in electricity RCEs, especially during thefiscal year ended June 30, 2008; and

·                 incremental volume of MWhrs sold resultingfrom operations acquired from Vantage Power Services, L.P. (“Vantage”) in May 2007.

 

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**Recent Developments and Trends**

 

***Customer Growth from DirectMarketing Initiatives***

 

Asa result of organic growth and strategic acquisitions, we have benefited from arobust increase in average RCEs, which have grown at a compound annual growthrate (“CAGR”) of 32% since 2002.  Thefollowing graph illustrates the growth in our average annual RCE count from2004 through 2008.

 

 

Whilea portion of our customer growth in recent years is attributable to customersadded through acquisitions, the majority of our customers at June 30, 2008have been added through organic growth. We have focused on the development of an experienced marketing and salesteam, multiple marketing channels, and strong customer care and customeroperations teams to support this growth. Our experienced pricing team also works closely with sales and marketingto quickly react to market changes and to provide products to prospectivecustomers that help manage energy price volatility.

 

Mostof our current customers have been acquired organically through door-to-door,telemarketing, direct mail, event and internet sales channels.  We are currently expanding our marketingchannels to include multi-level network marketing.  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 loyaltyinitiatives.

 

Weare focused on growing our customer base while controlling customer acquisitioncosts.  Our objective has been tomaintain customer acquisition costs below 12 months of gross profit resultingin a pay back period of less than one year.

 

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***GasKey Acquisition***

 

OnJanuary 22, 2008, we completed the acquisition of substantially all of theretail natural gas assets of PS Energy Group, Inc., primarily includingthe natural gas customer contracts of their GasKey division (the “GasKeyAcquisition”).  Nearly all of thecustomers served under such contracts are located in Georgia.  We acquired approximately 60,000 RCEs in theGaskey Acquisition.  Consistent with ourexperience with previous acquisitions, we expect attrition for this portfolioto be higher than our normal attrition. The majority of accounts acquired are commercial and industrialcustomers for which we expect to earn gross profit that is lower than that forour traditional mass-market business.

 

Pursuantto the terms of the related Asset Purchase Agreement, we purchased the GasKeynet assets for a base amount of approximately $4.3 million, plus workingcapital, plus contingent consideration payable for volumes consumed on customercontracts acquired for a 36-month period subsequent to the acquisition date.  Total operating cash outlay for the GasKeyAcquisition was approximately $12.0 million. The final purchase price was subject to certain adjustments inaccordance with the terms and conditions of such Asset Purchase Agreement.  We also assumed certain liabilities relatedto the GasKey assets.

 

Regulatoryapproval for the GasKey Acquisition was received in January 2008.  We recorded the transaction as a purchasebusiness combination as of January 1, 2008.  The total purchase price was paid from ouravailable cash balance.  The assetsacquired and related operations represent less than 10% of our consolidatedassets and operations.

 

***Operating Platform Enhancements***

 

Wehave invested substantial resources over the past two fiscal years to build astrong, scalable operating platform, including enhancement of our corporatefinance, billing, accounting, customer service, information technology,marketing and supply functions to support past and future business growth.  We have increased our staff headcount andhave made other investments to enhance our overall internal controlenvironment, particularly in information technology, customer operations,accounting and financial reporting controls, with the object of becoming compliantwith the requirements of the Sarbanes-Oxley Act of 2002 by June 30,2008.  During this time period, ourinformation technology investment included the integration of one of our legacyinformation systems onto information systems acquired from Shell EnergyServices Company L.L.C. (“SESCo”).

 

***Purchases of Floating Rate SeniorNotes due 2011***

 

Duringthe fiscal year ended June 30, 2008, we utilized cash and cash equivalentsto acquire $12.0 million aggregate principal amount of our outstanding FloatingRate Senior Notes due 2011 (the “Senior Notes”) from bondholders, in each case,for an amount less than face value. These transactions resulted in $0.8 million of aggregate gains on theearly extinguishment of debt that were recorded as a reduction of interestexpense for the fiscal year ended June 30, 2008.  We also recorded as additional interestexpense $0.5 million of original issue discount and debt issuance costs for thefiscal year ended June 30, 2008, which represents a pro rata portion ofsuch costs that were deferred at the issuance date of the Senior Notes.

 

***Amendments to and Extension of ourHedge Facility***

 

Althoughwe engage in hedging activities with various counterparties for electricity,our natural gas business utilizes a structured hedge facility as our primarynatural gas hedge facility (the “Hedge Facility”).  Under the Hedge Facility, we utilize New YorkMercantile Exchange (“NYMEX”) referenced over-the-counter swaps, basis priceswaps and options to hedge the risk of variability in the cost of naturalgas.  The Hedge Facility was originallyentered into on August 1, 2006 and had an initial term of two years withsubsequent one-year renewal terms.  In July 2008,the term of the Hedge Facility was extended to the earlier of August 1,2009 or 30 days prior to expiration of the Revolving Credit Facility. As aresult of extension of the Revolving Credit Facility to July 31, 2009 (seebelow) the Hedge Facility is currently due to expire on July 1, 2009.

 

TheHedge Facility provides the Company with the ability to enter into NYMEX andbasis swaps for a tenor of up to 39 months. The fees incurred under the HedgeFacility include an annual management fee, a volumetric fee based on the tenorof the swap and other fees, which allow the hedge provider to mitigate thepotential risks arising from material declines of natural gas market pricesbased on the Company’s overall hedge position with the provider.

 

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TheHedge Facility is secured by a first lien on all customer contracts and asecond lien on substantially all other assets of the Company.  The Company posted an initial balance of$25.0 million in cash collateral for potential negative mark-to-market changesin the value of the forward hedge position. The Company has the flexibility to post either cash collateral or issuea letter of credit as margin for the Hedge Facility.  As of June 30, 2008, the Company posteda $25.0 million letter of credit as margin.

 

Theagreement governing the Hedge Facility was amended in March 2008 and July 2008.  These amendments are described in “Liquidityand Capital Resources” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.”

 

***Amendments to and Extension of ourRevolving Credit Facility***

 

Weutilize a revolving credit facility with a syndicate of banks (the “Revolving CreditFacility”) primarily to post letters of credit required to effectively operatewithin the markets that we serve.  As of June 30,2008, MXenergy Inc. and MXenergy Electric Inc., as borrowers under theRevolving Credit Facility, were permitted to borrow up to the lesser of: (1) $280.0 million;or (2) the amount of the then applicable borrowing base.  The expiration date of our Revolving CreditFacility was December 19, 2008, at which time any outstanding principalamounts would have become due. Borrowings under our Revolving Credit Facility bore interest at a fluctuatingrate based upon a base rate or a Eurodollar rate plus an applicablemargin.  As of June 30, 2008, theapplicable margin for base rate loans was 1.00% per annum and the applicablemargin for Eurodollar loans was 2.00% per annum.  As of June 30, 2008, the fees associatedwith issuing letters of credit under the Revolving Credit Facility were 1.75%per annum.

 

AtJune 30, 2008, the total availability under the Revolving Credit Facilitywas $193.9 million, of which $147.9 million was utilized in the form ofoutstanding letters of credit.  We didnot draw any borrowings under our Revolving Credit Facility during the fiscalyear ended June 30, 2008, and there were no cash borrowings under theRevolving Credit Facility at June 30, 2008.

 

OnSeptember 30, 2008, the agreement that governs the Revolving CreditFacility was amended and restated to, among other things, reduce the totalavailability under the Revolving Credit Facility to $255.0 million in the termof the agreement through July 31, 2009. The agreement governing the Revolving Credit Facility was also amendedin December 2007 and March 2008, which amendments are described ingreater detail under the caption “Liquidity and Capital Resources” in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

**Our Core Products and Services**

 

Weprovide customers with a choice of natural gas and electricity products withalternative price structures that are designed to manage the risks of energyvolatility.  The two basic alternativeprice structures are variable market-based pricing and fixed price forwardcontracts. Pricing and terms for these products are developed so that at anygiven time, potential customers can choose the product to meet their householdor business needs.   We attempt to beflexible and to respond quickly to market conditions to ensure that ourproducts match consumer interests. Unlike competitors offering one product choice at a time, wesimultaneously provide multiple product offerings.  We also attempt to keep our product offeringssimple in order to facilitate marketing to residential and small commercialcustomers.

 

Wemarket variations of two basic products:

 

·                  ***Fixed price contracts –***Generally with****terms of up to three years for natural gasand electricity, fixed rate products provide consumers with price protectionagainst fluctuations in natural gas and electricity prices.  The fixed rate product protects consumersfrom increases in the unit price of natural gas or electricity.  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.  Weoffer customers different variations on the fixed rate product.  For example, customers may wish to have fixedrate protection only for the winter months while letting the summer price floatwith the market.  We have also offeredsome customers a cap product in which their price floats with the market butcannot exceed a fixed rate cap.

 

As of June 30, 2008, approximately 51% of ournatural gas customer portfolio had fixed rate contracts while the remaining 49%had variable rate contracts.  We have arisk management policy that is intended to reduce our financial exposurerelated to changes in the price of natural gas and electricity.  Under this policy, we hedge a 

 

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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 30,2008, contracts with our fixed price natural gas customers have an averageremaining life of approximately 12 months.

 

As of June 30, 2008, approximately 31% of ourelectricity customer portfolio had fixed rate contracts while the remaining 69%had variable rate contracts.  We hedge100% of anticipated electricity commodity purchases required to meet expectedcustomer demand for accounts served under fixed rate contracts. 

 

·                  ***Variable price contracts –***Variable price products generally are pricedcompetitively with the price offered by the region’s incumbent utility or otherlocal competitors (the “price to compare”, or “PTC”).  Our variable rate product is similar toutility variable rate pricing. By using alternative supply arrangements, we aresometimes able to supply customers with the commodity at a price lower than theutility’s tariff pricing due to the utility’s prior period cost recoverycharges or fixed term transportation costs. We do not guarantee to customers that our price will be below the PTC.

 

We generally do not hedge to protect against pricevolatility associated with variable rate natural gas contracts because ourvariable price is set ahead of the month of commodity flow, which ensures adirect correlation between our cost for commodity delivered and the pricecharged to the customer.

 

For electricity, our variable prices are set priorto the beginning of the month of commodity flow.  We purchase commodity for delivery based onour expected customer usage for that month. Any difference between actual consumption and our purchased commodityvolume results in pricing risk for the month.

 

**Our Markets and Customers**

 

***Geographic Concentrations***

 

RCEsby geographic area are summarized in the following table.

 
| ** **                                                                                                                                                       | ** **   | **RCEs at June 30,** | ** **   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|-------------------------------------|--------------|
| ** **                                                                                                                                                       | ** **   | **2008**                            | ** **   | **2007** | ** ** |
| ** **                                                                                                                                                       | ** **   | **No.**                             | ** **   | **% of  Total** | ** ** | **No.** | ** ** | **% of  Total** | ** ** |
| ** **                                                                                                                                                       | ** **   | ** **                          | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Southern U.S**(Georgia,  Texas, Florida):                                                                                                                      |         |                                |         |   |   |   |   |   |   |
| Natural gas                                                                                                                                                      |         | 241,000                             |         |   | ** ** | 209,000 | ** ** | ** ** | ** ** |
| Electricity                                                                                                                                                      |         | 25,000                              |         |   | ** ** | 12,000 | ** ** | ** ** | ** ** |
|                                                                                                                                                             |         | 266,000                             |         | 38 | % | 221,000 |   | 35 | % |
| **Northeastern U.S., Mid-Atlantic U.S. and  Canada******(New York,  New Jersey, Connecticut, Massachusetts, Pennsylvania, Maryland, Ontario, British  Columbia): |         |                                |         |   |   |   |   |   |   |
| Natural gas                                                                                                                                                      |         | 156,000                             |         |   | ** ** | 139,000 | ** ** | ** ** | ** ** |
| Electricity                                                                                                                                                      |         | 73,000                              |         |   | ** ** | 31,000 | ** ** | ** ** | ** ** |
|                                                                                                                                                             |         | 229,000                             |         | 29 | % | 170,000 |   | 38 | % |
| **Midwestern U.S.**(Ohio,  Michigan, Indiana, Illinois, Kentucky):                                                                                               | *** *** | *** ***                        | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Natural gas                                                                                                                                                      |         | 205,000                             |         |   | ** ** | 240,000 | ** ** | ** ** | ** ** |
| Electricity                                                                                                                                                      |         | —                              |         |   | ** ** | — | ** ** | ** ** | ** ** |
|                                                                                                                                                             |         | 205,000                             |         | 33 | % | 240,000 |   | 27 | % |
| **Total RCEs:**                                                                                                                                                  | ** **   | ** **                          | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Natural gas                                                                                                                                                      |         | 602,000                             |         |   | ** ** | 588,000 | ** ** | ** ** | ** ** |
| Electricity                                                                                                                                                      |         | 98,000                              |         |   | ** ** | 43,000 | ** ** | ** ** | ** ** |
|                                                                                                                                                             |         | 700,000                             |         | 100 | % | 631,000 |   | 100 | % |

 

Ourcustomer base consists of residential, small and mid-market commercialcustomers.  We have limited exposure tohigh concentrations of sales volumes to individual customers.  For the fiscal years ended June 30, 2008and 2007, our largest customer accounted for approximately 2% of total salesvolume.

 

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Ourdiversified geographical coverage provides several benefits to us, includingflexibility in product offerings and marketing campaigns, broad demographicmix, diversified credit and regulatory exposure.  Our multi-state approach allows us to:

 

·                 benefit from a diverse geographic stream ofsales;

·                 mitigate the delivery risk associated withdaily balancing gas markets;

·                 mitigate the risk of a single LDC default;

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

·                 mitigate the risk of extreme local weatherpatterns;

·                 mitigate the risk of material impact fromlocalized economic downturn;

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

·                 capitalize on our regional supply and pricingknowledge.

 

Thefollowing significant market activity and trends impacted our operations duringthe fiscal year ended June 30, 2008:

 

***Southern U.S. markets –***Total RCEs in our Georgia natural gas marketgrew approximately 17% during the fiscal year ended June 30, 2008.  Effective January 1, 2008, ouracquisition of the GasKey division of PS Energy Group, Inc. initiallyadded approximately 60,000 RCEs to our natural gas customer portfolio inGeorgia.  The impact of the GasKeyAcquisition was partially offset by normal attrition within the customerportfolio, which in turn was offset to some extent by new customers.

 

RCEsin our Texas electricity market increased 125% during the fiscal year ended June 30,2008.   In May 2007, we acquired the assets ofVantage (the “Vantage Acquisition”) and began to serve approximately 12,000RCEs in Texas shortly thereafter.  RCEsin Texas grew organically throughout the year, primarily due to the recentsuccess of expanded direct marketing activities.

 

***Northeastern U.S., Mid-Atlantic U.S.and Canadian markets –***Total RCEs within these geographic regions grew approximately 34%during the fiscal year ended June 30, 2008.  The main driver of higher RCEs in this regionwas significant organic electricity customer growth, which was largely due totargeted direct sales marketing activities and a wider range of productofferings to customers, particularly in our Massachusetts, Connecticut and NewYork electricity market areas.  During April 2007,we obtained our electricity marketer license to sell electricity in the Stateof Connecticut, and began delivering electricity to customers in Connecticut inJuly 2007.

 

***Midwestern U.S. markets –***Total RCEs in this geographic regiondecreased approximately 15% during the fiscal year ended June 30,2008.  Customer attrition within thisregion outpaced new customer growth, as we focused our marketing efforts inother markets with more favorable pricing opportunities.

 

Wehave taken a conservative approach in entering new deregulated electricitymarkets since we entered our first market in New York in 2004.  There are currently 19 states that are openfor direct access sales to end use customers of electricity.  We are evaluating each market to determinewhich present the best opportunities for entry. Our intent is to develop this business organically and throughacquisitions, as well as by leveraging potential cross-selling opportunitieswith our natural gas business.  Webelieve offering both natural gas and electricity to the same customerleverages our existing infrastructure and decreases customer turnover.

 

Forfiscal year 2009 and subsequent years, we will continue to consider expansionof our distribution of natural gas and electricity within our existing marketsas well as expansion into new LDC markets by leveraging our customer care andoperations platform, our information technology infrastructure and ourmulti-channel marketing system.   Thedecision to enter into new LDC markets will continue to be governed by severalfactors, including:

 

·                 compatibilitywith our existing operating systems and supply base;

·                 availabilityof utility billing and guarantees of customer accounts receivable;

·                 marketlocation and size; and

·                 theability to provide value to customers.

 

Wecontinuously assess conditions in market areas that we currently serve, as wellas new markets where we are not currently licensed.  In certain markets, we are monitoring thecompetitive conditions resulting from the actions of LDCs and local retailmarketers.  In addition, we are currentlystudying pending regulatory or legislative actions that could create favorableconditions for us to enter new markets. In September 2008, we received our certificate of qualification toconduct business in the State of California.

 

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**Attracting and Retaining Customers**

 

***Acquiring New Customers***

 

Toacquire new customers, we employ an integrated marketing approach that consistsof multiple combinations of direct marketing, traditional and online media,public relations and local event participation. The goal is to have directmarketing efforts, which include outbound telemarketing to both residential andsmall commercial customers, direct sales (outside sales focusing on small andmid-market commercial customers), and direct mail targeted to high purchasepropensity residential and small commercial customers, all of which combinedaccount for the majority of our total tactical marketing mix.

 

Overthe course of the final three quarters of fiscal 2008, we began to experiencehigher levels of organic customer additions as a result of the re-introductionof the door-to-door marketing channel implemented during the last quarter offiscal 2007.  In addition, we areintroducing a new network marketing channel after entering into an exclusivearrangement with Zurvita Inc.

 

Wecontinue to market to the mass-market residential and small commercialcustomers using direct mail, internet, telemarketing and door-to-doorprograms.  In addition, we market throughoutside sales agents to mid-market commercial customers. New products, such asthe “ENERGY STAR Rebate Program” and “You Save or We Pay Program”, have beenrecently introduced and other products have been offered from time to time aswell.  We have improved our ability torapidly capitalize on new opportunities created by price changes of utilitiesand competitors and by changes in the structure of forward markets.

 

***Retaining and Winning Back Customers***

 

Toretain existing customers, we rely on a team of highly trained internal andexternal customer care representatives. Customers requesting cancellation of service are provided information onthe volatility of natural gas rates and encouraged to retain the benefits oflong-term rate protection, if appropriate. If we receive notification from an LDC that a customer has cancelled orswitched to another supplier, attempts to communicate are made through bothmail and phone, encouraging the customer to reconsider his or her decision,reminding the customer of penalties he or she may incur and, in some cases,offering a new rate plan.

 

***Customer Renewals and Attrition***

 

In-contractcustomer attrition is defined as: (1) the loss of fixed rate customersbefore their contract term officially ends; and (2) the loss of variablerate customers, whose contracts generally do not have expiration dates, at anytime.  Such attrition usually occurs dueto customers moving from their homes or businesses, deterioratedcreditworthiness, or customers switching to another choice provider orreturning to service from the incumbent utility.  Average annualized in-contract customerattrition was approximately 19.7%, 25.6% and 20.8% for the fiscal years ended June 30,2008, 2007 and 2006, respectively.  Overthat period, we experienced an average annual in-contract customer attritionrate of approximately 22.0%, which we believe is consistent with the industryaverage.

 

Atthe end of each customer contract term, customer contracts in most of ourmarkets are renewed upon notification by the marketers unless the customerindicates otherwise.  During the fiscalyear ended June 30, 2008, approximately 88% of our customers that receivedsuch notification ultimately continued their relationship with us (excludingthe impact of a large municipal aggregation of customers that did not renew itscontract with us at the end of its contract term due to regulatory changes inour Ohio market).  During the three yearperiod from July 1, 2005 through June 30, 2008, approximately 89% ofour customers that received such notification of contract continued theirrelationship with us (excluding the impact of the municipal aggregationcustomers noted above).  At June 30,2008, we did not supply natural gas to customers under any municipalaggregation arrangements.

 

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Attritiondata is calculated based upon actual customer level data.  For analytical purposes, we assume that oneRCE represents a natural gas customer with a standard consumption of 100 MMBtusper year, or an electricity customer with a standard consumption of 10 MWhrs peryear.  However, each customer does notactually consume 100 MMBtus of natural gas or 10 MWhrs of electricity.  For example, one of our mid-market commercialcustomers may consume the equivalent of several hundred or even thousands ofRCEs.  Therefore, a decline in RCEs maynot be directly correlated with, or attributable to, actual customer attrition.

 

**Acquisitions**

 

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

 

·                 theacquired operations must be consistent with our business objectives to build aprofitable retail business;

·                 thecustomers of the acquired company must have been acquired by such company in amanner consistent with our marketing principles and values and in accordancewith applicable laws and regulations;

·                 theoperations of the acquired company can be integrated with existing internalsystems and processes;

·                 theacquired customers are located in markets that facilitate risk managementthrough transparent pricing, liquid instruments, and diversity of credit-worthysuppliers; and

·                 theacquisition can be comfortably supported by our financing capabilities.

 

Someof the companies we acquired are located in markets not previously served by usand therefore, provided us with new strategic marketing opportunities.  We intend to continue this strategy whenevaluating new acquisition opportunities. Since 1999, we have completed the following acquisitions:

 
| **Date**            | ** ** | **Company / Business Acquired** | ** ** | **Number and Type of RCEs** |
|---------------------|------------|------------------------------------------------|------------|-------------------------------------------------|
| May 2000       |       | Keyspan  Energy                                |       | 18,000  natural gas                             |
| March 2001     |       | Summit  Energy                                 |       | 15,000  natural gas                             |
| September 2001 |       | Energy.com                                     |       | 5,000  natural gas                              |
| February 2003  |       | Nicor  Gas                                     |       | 28,000  natural gas                             |
| March 2004     |       | Total  Gas & Electric, Inc.      |       | 90,000  natural gas                             |
|                |       |                                           |       | 13,000  electricity                             |
| 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                             |

 

In October 2008, we received regulatory andbankruptcy court approval and entered into an agreement to purchase liquefiednatural gas inventory from an insolvent Georgia-based retail gas company.  In connection therewith, the relatedportfolio of natural gas customers was transferred to the Company at no cost.  The total purchase price for the inventory wasapproximately $1.5 million.  The purchaseagreement also includes transition fees of approximately $0.5 million, whichwill be expensed as incurred.  Thisacquisition is not expected to have a material impact on our financial positionor results of operations for the fiscal year ended June 30, 2009.

 

**Market Deregulation and Competition**

 

Inmarkets that are open to competitive choice of retail energy suppliers, ourprimary competition comes from utility-affiliated retail marketers and small tomid-size independent retail energy companies. Competition is based primarily onproduct offering, price and customer service.

 

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

 

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Inmany cases, LDCs actively support deregulation and have welcomed the entry ofretail energy marketers.  Historically,regulated LDCs did not profit from commodity supplied to customers; rather,their rate of return was based on their hard assets or “rate base.”Accordingly, LDCs charged consumers for commodity on a pass-through basis, anddid not hedge their forward energy costs. By relieving LDCs of the need to engage in risk management, regulationspermitting retail competition allows LDCs to focus on their core competency oflocal distribution, which typically constitutes a significant portion of mostcustomers’ utility bills.  Many LDCsassume customer bad debt exposure since this encourages more market entrantsand supports continued deregulation. LDCs may recover the bad debt expense aspart of their tariff rates.  Theinterests of retail energy marketers and most LDCs are thus highly aligned,providing crucial support for continued deregulation, while increasingpenetration of the retail energy marketer model.  We have successfully forged strongrelationships with many of the LDCs throughout our service territories.

 

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

 

***Deregulated Natural Gas Industry***

 

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

 

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

 

Accordingto the Energy Information Agency (“EIA”), twenty-one states and the District ofColumbia have legislation or programs in place that let residential consumersand other small-volume users purchase natural gas from someone other than theirtraditional utility company.  As of December 31,2007, there were approximately 91 licensed natural gas marketers servingcustomers in deregulated states throughout the country.  According to the EIA, nearly 35 million ofthe approximately 65 million total residential gas customers in the U.S. haveaccess to choice programs, with approximately 4.6 million (or 13% of eligiblecustomers) purchasing from residential marketers. 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 attractive growthopportunities for residential marketers such as us.

 

AnLDC located in the state of New York that currently does not guarantee customeraccounts receivable began to guarantee such receivables, on amarketer-by-marketer basis, effective in October 2008.  This action will improve the collectabilityof customer accounts receivable in this market, thereby making growth in thismarket more attractive.

 

***Deregulated Electricity Industry***

 

In1978, Congress passed the Public Utility Regulatory Policies Act which laid thegroundwork for deregulation and competition by opening wholesale power marketsto non-utility producers of electricity. In 1996, FERC Orders 888 and 889 required open and equal access tojurisdictional utilities’ transmission lines for all electricity producers,thus facilitating the states’ restructuring of the electric power industry byallowing customers direct access to retail power generation.

 

Asa result of federal and state initiatives, the electric power industry inseveral states has changed from a structure characterized by highly regulated,vertically integrated local monopolies, which provide their customers with acomprehensive package of electricity services, to a deregulated structure.  The deregulated structure 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.  At least 16 states(Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, NewHampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island,Texas and Virginia) and the District of Columbia have deregulated electricity.

 

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Recentlegislation in Massachusetts is requiring all electricity LDCs to guarantee theaccounts receivable of retail suppliers. If enacted, this legislation would improve the collectibility ofaccounts receivable in our existing electricity markets in Massachusetts andmake entry into new markets within the state more attractive.

 

***Competition***

 

Sincethe mid-1980s, more than 250 marketers of natural gas have emerged.  However, most of these companies haveconfined their activities to wholesale trading and marketing to largeindustrial and commercial buyers of gas and power.  In 2001, approximately 160 marketersnationwide were actively marketing to retail customers of natural gas.  Today, the number is approximately 91 due toconsolidation within the industry. Moreover, the commitment of many of these marketers is often modest,confined to a limited geographic region, and represented by limited capital,personnel and operational support.

 

Wefocus on markets that are less susceptible to competitive pressures on profitmargins and that lend themselves to mass market techniques.  At the time our company was formed in 1999,as many as 12 to 15 marketers competed in each of its current marketareas.  Today only 5 to 10 competitivemarketers sell to retail customers.

 

Marketerscompeting for the commercial and residential markets fall into threecategories:  utility affiliates, nationalmarketers and niche marketers.  Weconsider our main competitors in natural gas to be Direct Energy (an affiliateof UK based Centrica), Ontario Energy Savings, (a publicly traded Canadiancompany also present in Illinois and New York), Gateway Energy Services andInterstate Gas Services.  In electricity,our primary competitors are Gateway Energy Services, Direct Energy and DominionRetail, in addition to merchant energy companies.

 

**Seasonalityof Our Operations**

 

Weatherconditions have a significant impact on customer demand and on the price ofnatural gas and electricity.  Customerdemand exposes us to a high degree of seasonality in sales, cost of sales,billing to and cash collections from customers, inventory requirements and cashflows.  In addition, customers who chooseto be on budget billing programs and LDC payment terms can cause timingdifferences between the billing and collection of accounts receivable and therecording of revenues.

 

Weutilize a considerable amount of cash from operations to fund customer accountsreceivable, natural gas inventory purchases and other working capitalrequirements during the months of November through April of eachfiscal year.  The majority of natural gasconsumption occurs during the months of November through March withcollections on accounts receivable peaking in the spring.  In contrast, electricity consumption peaksduring the summer months of June through September with collectionson accounts receivable peaking in late summer.

 

**Commodity Supply and Pricing Risk Management**

 

***Natural Gas Supply***

 

Wepurchase natural gas supply and manage transportation logisticsinternally.   We purchase physical supplyfrom over 50 natural gas producers, marketers, and energy trading firms ineither a producing region or at delivery point. We periodically adjust our portfolio of purchase/sales contracts,storage and transportation capacity based upon continual analysis of ourforecasted load requirements, and determine whether it will be more economicalto utilize natural gas from storage or to purchase from the spot market inrelation to transportation costs and availability.

 

Naturalgas is delivered to the LDC city-gate or other specified delivery points wherethe LDC takes control of the natural gas and delivers it to individualcustomers’ location of use, utilizing its extensive network of small diameterdistribution pipe.  In addition, mostLDCs provide ancillary services such as billing, meter reading and balancingservices.  Because of this extensivetransportation infrastructure and the services provided, LDC costs typicallymake up a significant portion of the end user’s utility bill.

 

***Electricity Supply***

 

Wepurchase physical electricity supply from the independent system operator, orISO, for all our power customers in New York, Connecticut andMassachusetts.  In the Texas market, wepurchase physical electricity directly from various counterparties for deliveryto the Electric Reliability Council of Texas, referred to herein as ERCOT,based on prices of the regional transmission organization, or RTO.

 

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***Commodity Pricing Risk Management***

 

Wehave a risk management policy that is intended to reduce our financial exposureto changes in the prices of natural gas and electricity.  Under this policy, the Company hedges allanticipated natural gas and electricity commodity purchases required to meetexpected customer demand for all accounts served under fixed price contracts(up to 110% in the winter months with respect to customer demand in certain gasutilities with daily balancing requirements and up to 110% in the summer monthswith respect to customer on-peak demand in certain electricity utilities).

 

Wehave elected not to designate any of the derivative instruments as hedges, inaccordance with applicable accounting rules. Accordingly, any changes in the fair value of these instruments areadjusted through unrealized gains or losses from risk management activities inthe consolidated statements of operations.

 

Weutilize both physical and derivative instruments to reduce our exposure tofluctuations in the prices of natural gas and electricity.  Natural gas commodity derivatives used ashedges typically have included swaps and options executed under our HedgeFacility.  Electricity commodityderivatives used as hedges have been executed with a select number ofcounterparties, including: BP North America, Shell Energy North America andConstellation Energy Commodities Group. As of June 30, 2008, our hedge positions extend through June 2011.

 

Underthe Hedge Facility, we utilize NYMEX referenced over-the-counter swaps, basisprice swaps and options to hedge the risk of variability in the cost of naturalgas.  The agreement governing the HedgeFacility was amended in March 2008 and July 2008.  Refer to Note 8 to the consolidated financialstatements, included elsewhere in of this Annual Report, for additionalinformation regarding the Hedge Facility.

 

Referto “Item 7A.  Quantitative andQualitative Disclosures About Market Risk”, for additional commentary regardingcommodity price risk.

 

**Our ForeignOperations**

 

Ourprincipal foreign operations are located in Canada.  Foreign operations comprised less than 1% ofour consolidated total assets at June 30, 2008 and less than 1% of ourconsolidated sales of natural gas and electricity for the fiscal year ended June 30,2008.

 

**OurManagement Team and Employees**

 

Themembers of our executive management team have extensive experience in energyrisk management and retail marketing as well as in creating, developing andmanaging businesses and risk on behalf of major internationalcorporations.  The professionalbackgrounds of our executive management team are described under “Item 10.  Directors, Executive Officers and CorporateGovernance.”

 

Asof June 30, 2008  we hadapproximately 220 full-time equivalent employees in the United States andCanada.  None of our employees is subjectto a collective bargaining agreement, and we believe that our relationship withour employees is good.

 

**Our Committed and Knowledgeable Equity Ownership**

 

Ourprimary stockholders include 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 as Sowood Commodity Partners Fund LP and before that, Lathi,LLC, a subsidiary of Harvard Management Company Inc.) and its affiliated fundsinvest in assets and companies that provide goods and services in commoditymarkets, primarily in the energy sector. Denham made an initial investment in us in February 2001.  In addition to its equity investment, Denhamprovides financing to us through a currently unused subordinated line ofcredit  that expires in May 2010 andalso provides risk management advice and strategic planning.

 

Charterhouseis a New York-based, middle-market private equity investment firm with a focuson buyouts, build-ups and growth capital financings.  Charterhouse made an initial investment in usin 2004.  Charterhouse invests in thebusiness 

 

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services(including the energy services sub-sector), consumer, and healthcare servicessectors.  Established in 1973,Charterhouse has invested in excess of $2 billion in equity capital in variouscompanies, including us.

 

GCPis an affiliate of Greenhill & Co., Inc. (“Greenhill”), anindependent global investment banking firm. GCP manages several private equity funds which total $1.8 billion incapital, focusing on the energy, financial services and telecommunicationsindustries.  Greenhill was founded in1996 and provides financial advisory and merchant banking fund managementservices through its offices in New York, London, Frankfurt and Dallas.

 

**Environmental Matters**

 

Wedo not have physical custody or control of the natural gas provided to ourcustomers, or any facilities used to transport natural gas.  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.

 

**Where You Can Find More Information**

 

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

 

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

 

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**ITEM 1A.   RISKFACTORS**

 

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

 

**Risks related to our business**

 

***Our risk management policies andhedging procedures may not mitigate risk as planned, and we may fail to fullyor effectively hedge our commodity supply and price risk exposure againstchanges in market rates or consumption volumes.***

 

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

 

Wehave contractual obligations to many of our customers to provide fullrequirements service and as a result, our hedging procedures require constantmonitoring and adjustment. Failure to continue to use valid assumptions maylead to inappropriate hedging positions. In addition, there are a number of factors that are beyond our control,such as risk of loss from counterparties’ nonperformance, volumetric risksrelated to customer demand and seasonal fluctuations.  Although we try to purchase anticipatoryhedges that represent volume we expect to sell to residential and smallcommercial customers for up to one month of projected marketing, we are exposedto the risk of a shortfall in marketing that could result in our purchasesexceeding 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.

 

***Actual customer attrition may exceedexpected attrition, which could result in a cost to cover for previouslypurchased fixed price hedges and physical supplies.***

 

Althoughour fixed price contracts with residential customers generally have terms of upto three years, those customers may terminate their contracts at any time for atermination fee that, in most cases, is relatively modest and does not bear anyrelation to our costs or lost profit with respect to the remainder of thecontract.  Most of our small andmid-market commercial customers cannot terminatetheir fixed price contracts without triggeringa damages provision designed to cover costs related to the termination of thosecontracts.  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 to cover the costs related toterminations by residential and small commercial customers.  To hedge effectively against terminations, wemust, at the inception of the contracts, attempt to accurately forecast thenumber of residential and small commercial customers that will terminate theircontracts prior to the end of their term. If we experience a number of cancellations greater than originallyforecasted or if we are not able to replace terminating customers with newcustomers, our financial results may be negatively impacted.

 

***Most of our financial swapagreements are settled against published index prices which could cease to bereliable or could become unavailable.***

 

Wehedge our forward natural gas exposures through a combination of physicalsupply purchase and financial swap agreements. Financial swap agreements may be settled against monthly NYMEXsettlement prices or against index prices published by various industrypublications.  NYMEX settlement pricescould be affected by supply and demand factors at the Henry Hub delivery pointof the contract which are not present elsewhere in the country.  Accordingly, the NYMEX settlement prices maycease to reflect accurately the market price of natural gas.  Likewise, index prices for market areas inwhich our customers are located, and which are contained in daily and monthlypublications, are published based on private polling of industry participantsand therefore may be distorted, deliberately or unintentionally, therebyceasing to be an accurate gauge of market pricing in those areas.

 

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

 

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***The accounting method utilized forour hedging activities results in volatility in our quarterly and annualfinancial results.***

 

Weengage in price-risk management activities related to our natural gas andelectricity purchases in order to economically hedge our exposure to commodityprice risk.  Through the use of financialand physical derivative contracts, we attempt to balance our physical andfinancial purchases and sales commitments. In accordance with current accounting guidelines, we have not designatedthese derivative instruments as hedges for accounting purposes.  Therefore, changes in the fair value of theseinstruments are recognized immediately in earnings.  As a result of this accounting treatment,changes in the forward prices of natural gas and electricity cause volatilityin our quarterly and annual earnings, which we are unable to fully anticipate.

 

***We may not have sufficient liquidityor credit capacity to hedge market risks, to continue to grow our business, orto operate effectively.***

 

OurHedge Facility expires on July 1, 2009. Upon expiration, we may not be able to replace the Hedge Facility onterms that will be favorable to us or at all, including terms related toguarantees, letters of credit, or additional cash collateral required toprotect counterparties against the risk of our default or insolvency.  Without a sufficient amount of workingcapital to post as collateral or cash margin, we may not be able to effectivelymanage price volatility or our market risk strategy, which could negativelyaffect our liquidity position and financial condition.

 

Ourcontractual agreements with certain LDCs require us to maintain restricted cashbalances or letters of credit as collateral for the performance risk associatedwith the future delivery of natural gas. These collateral requirements may increase as we grow our customerbase.  Additionally, we must post lettersof credit with our natural gas and electricity supply providers, the aggregatevalue of which could fluctuate based on the volume or cost of the commoditypurchased in any given month. Significant movements in market prices also can result in fluctuationsin the collateral required.  Theeffectiveness of our operations and future growth depends in part on the amountof cash and letters of credit available to enter into or maintain thesecontracts.  Such liquidity requirementsmay be greater than we anticipate or are able to meet.

 

***Despite our efforts to hedge riskand accurately forecast demand, our financial results are susceptible tochanging weather conditions and commodity price fluctuations and therefore willfluctuate on a seasonal and quarterly basis.***

 

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

 

Generally,demand for electricity peaks in the summer and demand for natural gas peaks inthe winter.  Recent growth in naturalgas-fired electric generation has introduced a secondary peak for natural gasin the summer.  Typically, when wintersare warmer than expected and summers are cooler than expected, demand forenergy is lower, resulting in less electric and gas consumption thanforecasted.  Likewise, when winters arecolder or summers are warmer than expected, consumption may be greater than wehave hedged and greater than we are able to meet with storage or swing supply.Depending on prevailing market prices for electricity and gas, these and otherunexpected conditions may reduce our sales or increase our costs and negativelyimpact our results of operations.  We mayexperience lower consumption volumes, and therefore, lower sales. We mayexperience losses from the purchase of additional volumes at higher prices orthe sale of excess volumes at prices below our acquisition cost.  Our failure to anticipate changing weatherdemands or to effectively manage our supply in response to changing demandscould negatively impact our financial results.

 

The impact of rapidly rising orfalling commodity prices also varies greatly depending on the period of timethat they occur within our fiscal year. Although operating results for a full fiscal year may not be materiallyimpacted by such trends due to our commodity hedging and contract pricingstrategies, they can have material short-term impacts on monthly and quarterlyoperating results, which may be misleading when considered outside of thecontext of our annual operating cycle. 

 

Large fluctuations in themarket price of natural gas and electricity within short periods of time alsomay have a negative impact on borrowing base availability under our RevolvingCredit Facility, which could limit the availability of creditnecessary to operate our business.

 

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***We are subject to direct credit riskfor certain customers who may fail to pay their bills as they become due.***

 

Weare responsible for the billing and collection functions for all of ourcustomers located in Georgia, Florida and Texas, and for our mid-marketcommercial customers located in New York, New Jersey and Ohio.  This group of customers representsapproximately 56% of our sales of natural gas and electricity.  In these markets, we bear the risk ofcustomers’ failure to pay their utility bills. With the exception of customers in Georgia and Texas, we have theability to terminate our agreement with customers in the event of non-payment,but we cannot terminate their electric or gas service**.**  Even if we terminateservice to customers who fail to pay their utility bill, we remain liable toour suppliers of electricity and natural gas for the cost of thosecommodities.  Furthermore, in the Georgiaand Texas markets, we are responsible for billing the distribution charges forthe local utility and are at risk for these charges, in addition to the cost ofthe commodity, in the event customers fail to pay their bills.  Rising energy prices also results in higherrisk of customers being unable to pay their bills when due.

 

Thefailure of our customers to pay their bills or our failure to maintain adequatebilling and collection procedures could adversely affect our results of operationsor 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 market.***

 

Asof June 30, 2008, approximately 54% of our RCEs were within markets wherethe LDC guarantees the billing and collection of customer accountsreceivable.  We rely on the utilities toperform timely and accurate billing under these agreements. As our businessgrows, the proportion of customers we serve that are billed by utilities couldincrease.  The bankruptcy of a utilitycould result in a default in such utility’s payment obligations to us.

 

Inaddition, LDCs that provide billing services and guarantee customer accountsreceivable rely on us for accurate and timely communication of contract ratesand other information necessary for accurate billing to customers.  The number of territories within which weprovide natural gas and electricity supply poses a constant challenge thatdemands considerable management, personnel and information systemsresources.  Each territory requiresunique and often varied electronic data interface systems.  Rules that govern the exchange of datamay be changed by the LDCs.  In certaininstances, we must rely on manual processes and procedures to communicate datainformation to LDCs for inclusion in customer bills.  Failure to provide accurate data to LDCs on atimely basis could adversely impact our results of operations.

 

***We depend on the accuracy of data inour billing systems.  Inaccurate datacould have a negative impact on our results of operations, financial condition,cash flows and reputation with customers and/or regulators.***

 

Wedepend on the accuracy and timeliness of customer billing, collections andconsumption information in our information systems.  We rely on many internal and external sourcesfor this information, including:

 

·                 our internal marketing and pricing andcustomer operations functions;

·                 LDCs with which we have billing serviceagreements; and

·                 various utility companies for volume or meterread information, certain billing rates and billing types (e.g., budget billing)and other fees and expenses.

 

Inaccurateor untimely information, which may be outside of our direct control, couldresult in:

 

·                 inaccurate and/or untimely bills sent tocustomers;

·                 inaccurate accounting and reporting ofcustomer revenues, gross profit and accounts receivable activity;

·                 customer complaints; and

·                 increased regulatory scrutiny.

 

***We depend on local transportationand transmission facilities of third parties to supply our customers. Ourfinancial results may be harmed if transportation and transmission availabilityis limited or unreliable.***

 

Wedepend on transportation and transmission facilities owned and operated byutilities and other energy companies to deliver the electricity and natural gaswe sell to customers.  Under theregulatory structures adopted in most jurisdictions, we are required to enterinto agreements with local incumbent utilities for use of the localdistribution systems and to establish functional data interfaces necessary toserve our customers.  Any delay in the negotiationof such agreements or inability to enter into reasonable agreements could delayor negatively impact our ability to serve customers in those jurisdictions,which could have an adverse impact on our business, results of operations, andfinancial condition.

 

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We also depend on localutilities for maintenance of the infrastructure through which we deliverelectricity and natural gas to our customers. We are limited in our ability to control the level of service theutilities 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.

 

If transportation ortransmission is disrupted, or if transportation or transmission capacity isinadequate, our ability to sell and deliver products may be hindered.  Such disruptions could also hinder ourproviding electricity or natural gas to our customers and adversely impact ourfinancial results.

 

Regulations in manymarkets require that meter reading and the billing and collection processes beretained by the local utility.  In thosestates, we also are required to rely on the local utility to provide us withour customers’ information regarding energy usage.  Our inability to confirm information receivedfrom the utilities 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 weserve.***

 

While there are barriersto entry, we operate only in markets that are open to alternate energysuppliers. Competition is based primarily on product offering, price andcustomer service.  We generally face competitionin those markets from utility-affiliated retail marketers and small to mid-sizeindependent retail energy companies. Some of these competitors or potential competitors may be larger andbetter 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 as electricpower 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, ourmarketing efforts may be hindered in a market where our offers are lesscompetitive relative to price offerings of the utilities or other marketers.Utilities historically react more slowly to changing commodity prices, whereasour products 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 topermit us to operate in deregulated segments of the electric and gasindustries.  If competitive restructuringof the electric or gas utility industries are altered, reversed, discontinuedor delayed, our business prospects and financial results could be materiallyadversely 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 the deregulated segments ofthe electric and gas markets created by these initiatives.  Regulations may be revised or reinterpretedor new laws and regulations may be adopted or become applicable to us or ouroperations.  Such changes may have adetrimental 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.  Other proposals to re-regulate may be madeand legislated or other attention to the electric and gas restructuring processmay delay or reverse the deregulation process or interfere with our ability todo 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, whichcould strain our liquidity and other resources and lead to poor customersatisfaction with our services.***

 

We intend to continue toassess new product offerings, apply new technologies for our businessdevelopment and make investments in 

acquisitions ofcomplementary companies.  If we buy acompany or business, we may experience difficulty integrating that company’spersonnel and operations, or key personnel of the acquired company may decidenot to work for us.  Furthermore, if 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

 

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make other types ofacquisitions, we may experience difficulty in assimilating the acquiredtechnology or products into our operations or information systems.  These difficulties could disrupt our ongoingbusiness, distract our management and employees, and increase our expenses.

 

The growth of ouroperations will depend upon, among other things, our ability to expand ourcustomer base in our markets and to enter new markets in a timely manner atreasonable costs.  We anticipate that ouremployee base will grow to accommodate our increased customer base.  As we expand our operations, we may encounterdifficulties integrating new customers and employees as well as any legacysystems of acquired entities.  We alsomay experience difficulty managing the growth of a portfolio of customers thatis diverse with respect to the types of service offerings, applicable market rules andthe infrastructure 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.  Our Revolving CreditFacility and Hedge Facility may not be adequate to meet these higher liquidityrequirements.

 

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 manageour growth and development successfully, our operating results and financialcondition could be adversely affected.

 

***Our success depends on key members of our management, theloss of whom could disrupt our business operations.***

 

We depend on thecontinued employment and performance of key management personnel.  A number of our senior executives havesubstantial experience in consumer and energy markets that have undergoneregulatory restructuring and have extensive risk management and hedgingexpertise.  We believe their experienceis important to our continued success. If our key executives do not continue in their present roles and are notadequately replaced, our business operations could be adversely affected.  In addition, failure to retain or adequatelyreplace our Chief Executive Officer could give rise to a default under ourRevolving Credit Facility.

 

***We rely on a capable, well-trained workforce to operateeffectively.  Retention of employees withstrong industry or operational knowledge is essential 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 employee turnover is expected, unusually high turnover couldstrain our ability to manage our ongoing operations as well as inhibit organicand acquisition growth.

 

***We are susceptible to downturns in general economicconditions, which could have a material adverse affect on our business, resultsof operations and financial condition.***

 

The natural gas andelectricity industries have historically been affected by general economicdownturns, including conditions within the housing market.  Periods of slowed economic activity generallyresult in decreased natural gas and electricity consumption, and could resultin increased customer attrition.  As aconsequence, national or regional recessions or downturns in economic activitythat impact our industrial, commercial and residential customers couldadversely affect our revenues, our collections of billed accounts receivableand our cash flows, and could restrict our future growth in certain markets,any of which could have an adverse effect on our business, results ofoperations and financial condition.

 

General economicconditions can also impact the performance of various counterparties to variousarrangements, including:

 

·                  failure of a supplier to delivercommodity at a specified time for a specified price under existing supplyagreements, which could result in penalty assessments against us and/or couldresult in higher commodity prices from purchasing replacement commodities onthe spot market;

·                  failure of local transportation andtransmission facilities to allow their facilities to be utilized in accordancewith related agreements, which could result in significant delays in deliveryor higher costs associated with located alternate facilities; and

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

 

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If a counterparty to ourhedge positions or lending agreements fails to perform, such failure could havean adverse effect on our business, results of operations and financialcondition.

 

***The successes, failures or activities of various LDCs andother retail marketers within the markets that we serve may impact theperception 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 customer service practices on the part of any utilityor retail marketer can damage the reputation of all market participants, whichcould result in lower customer renewals and impact our ability to sign-on newcustomers.  Any utility or retail marketerthat defaults on its obligations to its customers, suppliers, lenders, hedgecounterparties, or employees can have similar impact on the retail energyindustry as a whole and on our operations in particular.

 

***We are subject to regulatory scrutiny in all of ourmarkets.  Failure to follow prescribedregulatory guidelines could result in customer complaints and regulatorysanctions.***

 

We generally must applyto become a retail marketer of natural gas and electricity in the markets thatwe serve.  Approval by the localregulatory body is subject to our understanding of and compliance with variousfederal, state and local regulations that govern the activities of retailmarketers.  If we fail to comply with allsuch regulations, we could suffer certain consequences, which may include:

 

·                  higher customer complaints and attrition;

·                  increased regulatory scrutiny andsanctions, up to and including the loss of our license or ability to operate inthose markets; and

·                  damage to our reputation with customersand regulators.

 

***We expend extensive resources to convert, improve andmaintain our information systems. Failure to successfully do so may result in a negative impact on ourresults of operations, financial condition, cash flow and reputation with ourcustomers and/or regulators.***

 

Our operations relyheavily on the quality of our information systems and the employees that areresponsible to manage them.  If any ofour system conversion or improvement projects are unsuccessful, or if ourprocesses for managing and maintaining our information systems are inadequate,we could be subjected to:

 

·                  inaccurate or untimely financialaccounting and reporting information;

·                  inaccurate or untimely customer billinginformation;

·                  customer complaints;

·                  increased regulatory scrutiny;

·                  inability to successfully complete futurebusiness combinations or other customer acquisitions; and/or

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

 

***Our operations in Houston, Texas and the communities whereour customers and employees live along the southeast coast of Texas arevulnerable to hurricanes in the Gulf of Mexico.***

 

Because of its proximityto the Gulf of Mexico, the southeast coast of Texas is vulnerable tohurricanes, which can cause significant damage to property and publicinfrastructure.  In particular, damage toproperty and disruption of electrical and other basic utilities for extendedperiods can have a devastating impact on areas struck by hurricanes, includingour leased facilities and the communities where our employees live.  In addition, because we provide electricityto customers along the southeast coast of Texas, extended disruption of electricalservice also 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.

 

***Our reliance on the electrical power generation andtransmission infrastructure within the United States and Canada makes usvulnerable to large scale power blackouts.***

 

The power generation andtransmission infrastructure in the United States is very complex.  Maintaining reliability of the infrastructurerequires appropriate oversight by regulatory agencies, careful planning anddesign, trained and skilled

 

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operators, sophisticatedinformation technology and communication systems, ongoing monitoring and, wherenecessary, improvements to various components of the infrastructure.  Despite extensive oversight and developmentof numerous safeguards, major electric power blackouts are possible, whichcould disrupt electrical service for extended periods of time to largegeographic regions of the United States and Canada.  If such a major blackout were to occur, wemay be unable to deliver electricity to our customers in the affected region,which would have an adverse impact on our results of operations.

 

**Risksrelated to Liquidity, Indebtedness and Capital**

 

***We may need to raise additional debt or letter of creditcapacity to fund growth or operations, which may not be available to us onfavorable terms or at all.***

 

Our business requiressubstantial capital to fund growth through organic marketing or acquisition,for supporting working capital, for the purchase of natural gas and electricitysupply to meet our customers’ needs, and for the credit requirements of forwardphysical supply.

 

We may need to incuradditional debt or obtain additional letter of credit capacity in order to fundworking capital, finance other acquisitions or for other purposes.  We cannot be certain that we will be able toobtain such additional financing on favorable terms or at all.  If we need additional debt or letter ofcredit capacity and cannot raise it on acceptable terms, our financialcondition and business will be adversely affected.

 

We believe our lines ofworking capital financing are sufficient to meet our current and anticipatedneeds, but these lines may be reduced in accordance with the terms of suchagreements.  Moreover, in the event ourneeds change, either because of growth or higher energy costs, additionalworking capital financing capacity may be necessary and there can be noassurance that such arrangements will be available on terms acceptable to us orat all.

 

***Our business growth over the past two fiscal years has beenfunded by significant debt obligations, particularly our obligations under theSenior Notes.  Any material adversefinancial events or trends could adversely affect our financial health andprevent us from fulfilling our debt obligations.***

 

As of June 30, 2008,we had $162.6 million****aggregateprincipal amount of Senior Notes outstanding (net of discount), which wereissued to fund our acquisition of SESCo in August 2006 (the “SESCoAcquisition”).  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 togeneral economic, financial, competitive and other factors that are beyond ourcontrol.

 

***We will require a significant amount of cash to service ourdebt obligations.  Our ability togenerate sufficient cash to service debt depends on the ability of our primaryoperating subsidiaries to generate adequate cash flow.***

 

Holdings has no materialoperating activities.  Accordingly,Holdings’ only material source of cash, including cash to service the SeniorNotes and other debt obligations, comes from Holdings’ ownership interests inits primary operating subsidiaries. Available distributions from our operating subsidiaries may depend onfactors 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.

 

There can be no assurancethat our business will generate sufficient cash flow from operations in thefuture, that our currently anticipated growth in net sales and cash flow willbe realized or that future borrowings will be available to us in an amountsufficient to enable us to repay indebtedness, including our Senior Notes,which are due in 2011.  We may need torefinance all or a portion of our indebtedness on or before maturity.  There can be no assurance that we will beable to refinance any of our indebtedness on commercially reasonable terms orat all.

 

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***Our interest expense would increase if interest ratesincrease which would have a negative impact on our financial performance.***

 

We use interest rateswaps to hedge the floating rate interest expense on the Senior Notes.  As of June 30, 2008, the following swaparrangements were outstanding:  (1) a$50.0 million swap that expired on August 1, 2008; (2) a $30.0million swap that expires on August 2, 2010; and (3) an $80.0 millionswap that expires on August 1, 2011. All swaps are fixed-for-floating and settle against the six-month LIBORrate.  Since interest rate exposureassociated with the Senior Notes is not fully hedged, a 1% change in LIBOR,after taking into account the average outstanding notional amount of ourinterest rate swap agreements, would result in our interest expense fluctuatingapproximately $0.4 million per year based on our average monthly debtbalance for the fiscal year ended June 30, 2008.  We may not be successful in renewing orobtaining additional hedges on acceptable terms or at all, which could have anadverse effect on our results of operations or our ability to serviceoutstanding indebtedness.

 

***Our substantial debt obligations could adversely affect ourfinancial health and prevent us from fulfilling such obligations, including ourobligations under the Senior Notes, and we might have difficulty obtaining morefinancing.***

 

We have a substantialamount of indebtedness in relation to our equity.  As of June 30, 2008, we hadapproximately $162.6 million of total outstanding indebtedness under our SeniorNotes and $147.9 million in issued letters of credit under our RevolvingCredit Facility.  In addition, we had$46.0 million of unused availability under our Revolving Credit Facility and$12.0 million of unused availability under our line of credit with Denham(the “Denham Credit Facility”).  Oursubstantial debt obligations could have important consequences, which couldinclude:

 

·                  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 inenergy prices or other adverse industry or financial trends that are outside ofour direct control could cause us to draw down on a portion or all of ouravailable credit.  We may requireadditional indebtedness in the future. Our ability to obtain new debt may be limited by the agreementsgoverning the Senior Notes and our credit facilities.  If new debt is added to current debt levels,the related risks described above could intensify. If such debt financing isnot available when required or is not available on acceptable terms, we may beunable to grow our business, take advantage of business opportunities, respondto competitive pressures or refinance maturing debt, any of which could have amaterial adverse effect on our operating results and financial condition.

 

***Our funding for future growth may depend upon obtaining newfinancing, which may be difficult to obtain given prevalent economic conditionsand our credit ratings.***

 

In order to accomodate futuregrowth in our natural gas and electricity businesses, we may need additionalfunding beyond cash provided from current operations and available balancesunder our current credit facilities.  Ourability to obtain new financing will be constrained by current economicconditions affecting financial markets. Specifically, the recent credit crisis and other related trendsaffecting the banking industry have caused significant operating losses andbankruptcies throughout the banking industry. Many lenders and institutional investors have ceased to provide fundingto even the most credit-worthy borrowers. If the availability of credit is negatively impacted to the extent thatwe are unable to obtain additional financing, we may be unable to takeadvantage of opportunities to acquire customer portfolios or operations ofother retail energy businesses, to finance our existing operations or tootherwise expand our business as planned.

 

***The agreement pursuant to which Holdings issued preferredstock contains redemption provisions, which are subject to various triggeringevents and/or dates.  If Holdings isrequired to redeem the preferred stock, we may have to seek additional debt financing.***

 

On or after the fifthanniversary of the issuance of Holdings’ redeemable convertible preferred stock(the “Preferred Stock”), if the fair market value of our common stock is at alevel that would not provide the holders of Preferred Stock an annual

 

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rate of return of atleast 25%, compounded annually, for the five-year period ending June 30,2009, such holders may require us to make a redemption election.  If the holders of the Preferred Stock requireus to make a redemption election at June 30, 2009, the earliest possible datefor such a request, and if we elect to redeem the Preferred Stock, theredemption price would be, at a minimum, approximately $54.6 million at June30, 2009; and would continue to increase, at a minimum, at a compounded annualrate of 12% thereafter.  This wouldrepresent a substantial liquidity event for us, and would require us to seekadditional debt financing and/or equity investors for funding of thetransaction.

 

If we elect not to redeemthe Preferred Stock, we would be required to grant the holders of PreferredStock effective control over our Board of Directors, which could have an impacton the future direction of the Company.

 

***We are currently considering options for renewing, extendingor replacing the Revolving Credit Facility and the Hedge Facility.  The current credit market environment and ourcurrent credit ratings may hamper our ability to negotiate renewals, extensionsor replacements for these facilities on terms acceptable to us or at all.***

 

The original expirationdate of our Hedge Facility was August 1, 2008.  On July 31, 2008, the agreementgoverning the Hedge Facility was amended to reflect revisions to certainprovisions, including extension of the termination date through August 1,2009.

 

The original expirationdate of our Revolving Credit Facility was December 19, 2008.  On September 30, 2008, the agreementgoverning the Revolving Credit Facility was amended and restated to, amongother things, extend the termination date through July 31, 2009, at whichtime any outstanding principal amounts will become due.  Additionally, if the revolving creditfacility is not extended or replaced, we will not be able to have letters ofcredit issued on our behalf after July 31, 2009.

 

We are currentlyconsidering options for negotiating renewal of the Hedge Facility and theRevolving Credit Facility, for further extension of the current facilityagreements or for negotiating facilities with new hedge or financingfacilitators.  Although we expect that wewill be able to renew, extend or replace the existing facilities, if thecurrent lack of available credit continues and/or our credit ratings do notimprove, it may hinder our ability to negotiate these agreements.  However, no assurances can be made that wewill be able to do so on terms that will be favorable to us relative to thecurrent terms of the facilities or at all.

 

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**ITEM1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM2.  PROPERTIES**

 

Our corporateheadquarters, which are comprised of executive, finance, marketing, riskmanagement, internal audit and legal functions, are located in Stamford,Connecticut.  During the fiscal yearended June 30, 2007, as a result of the SESCo Acquisition, we movedseveral of our operational functions, including pricing, information technology,customer operations and data solutions, accounting operations, collections, andcertain human resources functions to Houston, Texas, where most of ouremployees currently work.

 

We lease all of ourproperties.  As of June 30, 2008,management believes that all properties are suitable and adequate for thebusiness conducted therein, are being appropriately used and have sufficientcapacity for the present intended purposes.

 

**ITEM3.  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.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

No matters were submittedto a vote of security holders during the fiscal year ended June 30, 2008.

 

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## ***PART II.***

## *** ***

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

 

There is no establishedtrading market for our common stock, par value $.01 per share.  As of August 31, 2008, there were 69holders of record of our 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 are funds available to do so.  In addition, holders of the Preferred Stockare entitled to participate in any dividend paid on our common stock.

 

We are restricted in ourability to pay dividends by various provisions of agreements that govern ourdebt instruments.  We have never declaredor paid any cash dividends on our common stock and do not intend to pay anycash dividends on our common stock in the foreseeable future.  We currently intend to retain any futureearnings to finance the expansion of our business and for general corporatepurposes.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

The table below providesinformation, as of June 30, 2008, concerning securities authorized forissuance under our equity compensation plans. Refer to Notes 2 and 17 to the consolidated financial statements,included elsewhere in this Annual Report, for additional information regardingour stock-based 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) |       | 1,079,820                                                                                                 |       | $                                                                    | 27.50      |                                                                                                                             | 333,112    |   |
|                                                            |            |                                                                                                           |            |                                                                      |            |                                                                                                                                  |            |  |

 

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(1)          As of June 30, 2008, allof our equity compensation plans were approved by security holders.

(2)          Excludes 41,500 warrantsissued to employees that were not issued under any equity compensationplan.  As of June 30, 2008, theweighted average exercise price for these warrants was $22.43.

(3)          Excludes securities reflectedin the first column.

 

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**ITEM6.  SELECTED FINANCIAL DATA**

 

**AdjustedEBITDA**

 

Management believes thatAdjusted EBITDA, a non-U.S. GAAP measure defined below, is a measure commonlyused by financial analysts in evaluating operating performance and liquidity ofcompanies, including energy companies. Management also believes that thismeasure allows a standardized comparison between companies in the energyindustry, while minimizing the differences from depreciation policies,financial leverage, hedging strategies and tax strategies.  Accordingly, management believes thatAdjusted EBITDA is the most relevant financial measure in assessing ouroperating performance and liquidity. Adjusted EBITDA, as used herein, is not necessarily comparable tosimilarly titled measures of other companies.

 

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-cashcharges.  Therefore, we believe thatEBITDA would not provide an accurate reflection of the economic performance ofthe business since it includes the unrealized gains (losses) from riskmanagement activities without giving effect to the offsetting changes in marketvalue of the underlying customer contracts, which are being economicallyhedged.  In addition, as the underlyingcustomer contracts are not marked to market, the unrealized gains (losses) fromrisk management activities do not offer an accurate indication of the ultimatecash impact to the business, as the ultimate cash impact to the business is notdeterminable until delivery of natural gas under the customer contracts and theassociated realized gain (loss) on risk management 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 and rationalizingour internal resources.  In addition,Adjusted EBITDA is a key variable for estimating our equity value, includingvarious equity instruments (such as common stock, preferred stock, stockoptions and warrants), and assessing compensation incentives for ouremployees.  Management also providesfinancial performance measures to our senior executive team and significantshareholders with an emphasis on Adjusted EBITDA, on a consolidated basis, asthe appropriate basis with which to measure the performance and liquidity ofour business.  Furthermore, certainfinancial covenants in our Revolving Credit Facility and our Hedge Facilitycontain ratios based on EBITDA and the items defined above that are excluded tocalculate Adjusted EBITDA, as well as other items.  Accordingly, management and our significantshareholders utilize Adjusted EBITDA as a primary measure when assessing ouroperating performance and 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 ongoing operations;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 audited consolidatedfinancial statements, which are included elsewhere in this Annual Report.  The table includes a reconciliation from netincome (loss) prepared on a U.S. GAAP basis to EBITDA and Adjusted EBITDA.  The financial information in the table shouldbe read in conjunction with, and is qualified by reference to, our consolidatedfinancial statements and notes thereto and commentary included in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

Selected consolidatedoperating and balance sheet data is summarized in the following table.

 
| ** **                                                    | ** ** | **Fiscal Year Ended June 30,** | ** **  |
|---------------------------------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                                                    | ** ** | **2008**                                           | ** **  | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**                            | ** **  |
| **Selected statement of operations data:**                    |       |                                               |        |   |   |   |   |   |   |   |   |
| Sales of natural gas and electricity (1)                      | ** ** | **$**                                              | **752,283** |   | $ | 703,926 |   | $ | 362,561 |   | $ | 277,196 |   | $ | 185,659 |   |
| Cost of goods sold                                            | ** ** | **569,585**                                        | ** **  | 602,146 |   | 389,526 |   | 202,112 |   | 109,926 |   |
| Gross profit (loss)                                           | ** ** | **182,698**                                        | ** **  | 101,780 |   | (26,965 | ) | 75,084 |   | 75,733 |   |
| Operating expenses (2)                                        | ** ** | **106,645**                                        | ** **  | 91,015 |   | 36,618 |   | 30,996 |   | 22,331 |   |
| Operating profit (loss)                                       | ** ** | **76,053**                                         | ** **  | 10,765 |   | (63,583 | ) | 44,088 |   | 53,402 |   |
| Interest expense, net of interest income                      | ** ** | **34,105**                                         | ** **  | 33,058 |   | 3,200 |   | 2,858 |   | 3,109 |   |
| Income (loss) before income tax (expense) benefit             | ** ** | **41,948**                                         | ** **  | (22,293 | ) | (66,783 | ) | 41,230 |   | 50,293 |   |
| Income tax (expense) benefit                                  | ** ** | **(17,155**                                        | **)**       | 8,495 |   | 27,001 |   | (18,142 | ) | (20,117 | ) |
| Net income (loss)                                             | ** ** | **24,793**                                         | ** **  | (13,798 | ) | (39,782 | ) | 23,088 |   | 30,176 |   |
|                                                          |       |                                               | ** **  |   |   |   |   |   |   |   |   |
| Items to reconcile net income (loss) to EBITDA :              |       |                                               | ** **  |   |   |   |   |   |   |   |   |
| Add: Interest expense, net of interest income                 | ** ** | **34,105**                                         | ** **  | 33,058 |   | 3,200 |   | 2,858 |   | 3,109 |   |
| Depreciation and amortization                                 | ** ** | **32,698**                                         | ** **  | 27,730 |   | 8,504 |   | 6,166 |   | 6,894 |   |
| Income tax expense (benefit)                                  | ** ** | **17,155**                                         | ** **  | (8,495 | ) | (27,001 | ) | 18,142 |   | 20,117 |   |
| EBITDA                                                        | ** ** | **108,751**                                        | ** **  | 38,495 |   | (55,079 | ) | 50,254 |   | 60,296 |   |
|                                                          |       |                                               | ** **  |   |   |   |   |   |   |   |   |
| Items to reconcile EBITDA to Adjusted EBITDA:                 |       |                                               | ** **  |   |   |   |   |   |   |   |   |
| Add (less): Stock compensation expense (2)                    | ** ** | **3,358**                                          | ** **  | 4,539 |   | 911 |   | 2,033 |   | 1,894 |   |
| Unrealized (gains) losses from risk management activities (3) | ** ** | **(67,168**                                        | **)**       | 17,079 |   | 79,897 |   | (16,004 | ) | (46,360 | ) |
| Adjusted EBITDA                                               | ** ** | **$**                                              | **44,941**  | ** ** | $ | 60,113 |   | $ | 25,729 |   | $ | 36,283 |   | $ | 15,830 |   |
|                                                          |       |                                               | ** **  |   |   |   |   |   |   |   |   |
| **Selected balance sheet data (period-end  balances):**       |       |                                               | ** **  |   |   |   |   |   |   |   |   |
| Total current assets                                          | ** ** | **$**                                              | **271,973** | ** ** | 257,708 |   | $ | 67,517 |   | $ | 157,122 |   | $ | 122,363 |   |
| Customer acquisition costs, net                               | ** ** | **41,693**                                         | ** **  | 38,954 |   | 10,822 |   | 7,171 |   | 10,439 |   |
| Total assets                                                  | ** ** | **355,752**                                        | ** **  | 335,644 |   | 97,969 |   | 191,592 |   | 162,221 |   |
| Total current liabilities                                     | ** ** | **108,276**                                        | ** **  | 91,686 |   | 29,894 |   | 74,640 |   | 60,607 |   |
| Long-term debt (4)                                            | ** ** | **162,648**                                        | ** **  | 185,404 |   | — |   | 21,379 |   | 27,221 |   |
| Redeemable convertible preferred stock (5)                    | ** ** | **48,779**                                         | ** **  | 29,357 |   | 29,357 |   | 29,357 |   | 29,730 |   |
| Total stockholders’ equity                               | ** ** | **33,210**                                         | ** **  | 25,611 |   | 64,750 |   | 105,277 |   | 79,363 |   |

 

----

(1)          Includes pass-throughrevenue, primarily representing transportation and distribution charges billedto customers on behalf of certain LDCs, that approximate $63.6 million and$54.5 million for the fiscal years ended June 30, 2008 and 2007,respectively. Also includes fee income charged to customers, such as latepayment fees, early termination fees and service shut-off fees that approximate$19.4 million and $17.1 million for the fiscal years ended June 30, 2008and 2007, respectively.  Pass-throughrevenue and fee income was not material for fiscal years prior to 2007.

(2)          Effective July 1, 2006,the Company adopted the provisions of SFAS No. 123R, “Share-Based Payment(revised)”.  Refer to Notes 2 and 17 ofour consolidated financial statements included elsewhere in this Annual Reportfor additional information.

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

(4)          The Senior Notes (net oforiginal issue discount) were issued during the fiscal year ended June 30,2007 primarily to provide financing for the SESCo Acquisition, with the balancebeing used for working capital needs.

(5)          On or after the fifth anniversary of the issuance ofthe Preferred Stock, if the fair market value of Holdings’ common stock is at alevel that would not provide the Preferred Investors with an annual rate ofreturn of at least 25%, compounded annually, for the five-year period endingJune 30, 2009, the Preferred Investors may require that the Company make aredemption election.  If the holders ofthe Preferred Stock require the Company to make a redemption election, and ifthe Company elects to redeem the Preferred Stock, the redemption amount ispayable in cash equal to the greater of: (1) the fair market value of theshares of common stock into which the Preferred Stock may be converted on thedate of the redemption election notice; or (2) the original issue price of$21.36 per share, plus any accrual of dividends.  If the Company elects not to redeem thePreferred Stock, it is required to grant the Preferred Investors effectivecontrol over Holding’s Board of Directors. As of June 30, 2008, if the holders of Preferred Stock were to requestthat the Company make a redemption election, the Company does not have theintent or the ability to redeem the Preferred Stock due to limitations includedin the agreements that govern the Revolving Credit Facility, the Hedge Facilityand the Senior Notes.  However, since thePreferred Investors would effectively control the Company’s Board of Directorsin the event that the Company does not elect to redeem the Preferred Stock, theCompany has determined that, in accordance with U.S. GAAP, the Preferred Stockis redeemable at the option of the Preferred Investors and that it is probablethat the Preferred Stock will become redeemable at June 30, 2009.  Therefore the carrying value of the PreferredStock is recorded outside of stockholders’ equity on the consolidated balancesheets and has been adjusted to its redemption value as of June 30, 2008.  Refer to Note 16 of the consolidatedfinancial statements for additional information regarding the Preferred Stock.

 

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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,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                           |       | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                  |       |                                               |       |   |   |   |   |   |   |   |   |
| Adjusted EBITDA                                                                       | ** ** | **44,941**                                         |       | 60,113 |   | 25,729 |   | 36,283 |   | 15,830 |   |
| Interest expense, net of interest income                                              | ** ** | **(34,105**                                        | **)**      | (33,058 | ) | (3,200 | ) | (2,858 | ) | (3,109 | ) |
| Income tax (expense) benefit                                                          | ** ** | **(17,155**                                        | **)**      | 8,495 |   | 27,001 |   | (18,142 | ) | (20,117 | ) |
| Stock compensation expense                                                            | ** ** | **(1,654**                                         | **)**      | — |   | — |   | — |   | — |   |
| Deferred tax expense (benefit)                                                        | ** ** | **18,187**                                         | ** ** | (14,449 | ) | (32,764 | ) | 6,552 |   | 19,730 |   |
|                                                                                  |       |                                               | ** ** |   |   |   |   |   |   |   |   |
| Unrealized losses on interest rate swaps and  amortization of deferred financing fees | ** ** | **10,836**                                         | ** ** | 7,906 |   | 1,057 |   | 349 |   | 207 |   |
| Amortization of customer contracts acquired                                           | ** ** | **(762**                                           | **)**      | 11,891 |   | (3,276 | ) | — |   | — |   |
| Change in assets and liabilities, net of effects  of acquisition:                     |       |                                               | ** ** |   |   |   |   |   |   |   |   |
| Restricted cash                                                                       | ** ** | **463**                                            | ** ** | (623 | ) | 6,953 |   | 2,195 |   | (192 | ) |
| Accounts receivable                                                                   | ** ** | **(30,181**                                        | **)**      | 3,453 |   | (13,003 | ) | 3,271 |   | 1,976 |   |
| Natural gas inventories                                                               | ** ** | **(7,308**                                         | **)**      | (1,712 | ) | (2,685 | ) | (72 | ) | (970 | ) |
| Income taxes receivable                                                               | ** ** | **(7,173**                                         | **)**      | 5,184 |   | (5,535 | ) | — |   | — |   |
| Option premiums                                                                       | ** ** | **1,191**                                          | ** ** | 1,835 |   | (1,834 | ) | — |   | — |   |
| Other assets                                                                          | ** ** | **609**                                            | ** ** | (993 | ) | 2,645 |   | 895 |   | (4,610 | ) |
| Accounts payable and accrued liabilities                                              | ** ** | **17,882**                                         | ** ** | 31,555 |   | (5,320 | ) | 1,283 |   | 2,646 |   |
| Deferred revenue                                                                      | ** ** | **(4,352**                                         | **)**      | 9,384 |   | 865 |   | 1,538 |   | — |   |
| Net cash (used in) provided by operating  activities                                  | ** ** | **(8,581**                                         | **)**      | 88,981 |   | (3,367 |   | 31,294 |   | 11,391 |   |
| Net cash used in investing activities                                                 | ** ** | **(33,941**                                        | **)**      | (132,920 | ) | (18,825 |   | (8,296 | ) | (16,154 | ) |
| Net cash (used in) provided by financing  activities                                  | ** ** | **(22,462**                                        | **)**      | 174,788 |   | (25,345 |   | 24,396 |   | 7,718 |   |

 

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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)** | ** **  |
| **2008:**                                                                           | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Sales                                                                               | ** ** | **$**                   | **669,522** | ** **      | **$**      | **82,761**   | ** ** | **$** | **752,283** | ** ** |
| Cost of goods sold (1)                                                              | ** ** | **(564,219**            | **)**       | **(72,534**     | **)**      | **(636,753** | **)**      |
| Gross profit (1)                                                                    | ** ** | **$**                   | **105,303** | ** **      | **$**      | **10,227**   | ** ** | **115,530** | ** ** |
| ** **                                                                          | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Items to reconcile total segment gross profit to  income before income tax expense: | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Unrealized gains (losses) from risk management  activities                          | ** ** | ** **              | ** **  | ** **      | ** ** | **67,168**   | ** ** |
| Operating expenses                                                                  | ** ** | ** **              | ** **  | ** **      | ** ** | **(106,645** | **)**      |
| Interest expense, net of interest income                                            | ** ** | ** **              | ** **  | ** **      | ** ** | **(34,105**  | **)**      |
|                                                                                | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| Income before income tax expense                                                    | ** ** | ** **              | ** **  | ** **      | ** ** | **$**        | **41,948** | ** ** |
| ** **                                                                          | ** ** | ** **              | ** **  | ** **      | ** ** | ** **   | ** ** |
| **2007:**                                                                           |       |                    |        |            |       |         |       |
| Sales                                                                               |       | $                       | 680,811     |            | $          | 23,115       |       | $ | 703,926 |   |
| Cost of goods sold (1)                                                              |       | (565,531                | )           | (19,536         | )          | (585,067     | )          |
| Gross profit (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                          |       |                    |        |            |       | (17,079      | )          |
| Operating expenses                                                                  |       |                    |        |            |       | (91,015      | )          |
| Interest expense, net of interest income                                            |       |                    |        |            |       | (33,058      | )          |
|                                                                                |       |                    |        |            |       |         |       |   |
| Loss before income tax benefit                                                      |       |                    |        |            |       | $            | (22,293    | ) |
|                                                                                |       |                    |        |            |       |         |       |
| **2006:**                                                                           |       |                    |        |            |       |         |       |
| Sales                                                                               |       | $                       | 345,629     |            | $          | 16,932       |       | $ | 362,561 |   |
| Cost of goods sold (1)                                                              |       | (296,607                | )           | (13,022         | )          | (309,629     | )          |
| Gross profit (1)                                                                    |       | $                       | 49,022      |            | $          | 3,910        |       | 52,932 |   |
|                                                                                |       |                    |        |            |       |         |       |
| Items to reconcile total segment gross profit to  loss before income tax benefit:   |       |                    |        |            |       |         |       |
| Unrealized gains (losses) from risk management  activities                          |       |                    |        |            |       | (79,897      | )          |
| Operating expenses                                                                  |       |                    |        |            |       | (36,618      | )          |
| Interest expense, net of interest income                                            |       |                    |        |            |       | (3,200       | )          |
|                                                                                |       |                    |        |            |       |         |       |
| Loss before income tax benefit                                                      |       |                    |        |            |       | $            | (66,783    | ) |

 

----

(1)          Includesrealized 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 of naturalgas under the customer contracts and the associated gain (loss) on riskmanagement 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,** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Natural Gas:**                             |       |                                               |       |   |   |   |   |   |   |   |   |
| RCEs at period end                           | ** ** | **602,000**                                        |       | 588,000 |   | 375,000 |   | 337,000 |   | 350,000 |   |
| Average RCEs during the period               | ** ** | **588,000**                                        |       | 595,000 |   | 380,000 |   | 338,000 |   | 288,000 |   |
| MMBtus sold during the period                | ** ** | **54,339,000**                                     |       | 57,064,000 |   | 35,488,000 |   | 32,957,000 |   | 25,771,000 |   |
| Sales per MMBtu during the period            | ** ** | **$**                                              | **12.32**  |   | $ | 11.93 |   | $ | 9.74 |   | $ | 8.03 |   | $ | 7.04 |   |
| Gross profit per MMBtu during the period (1) | ** ** | **$**                                              | **1.94**   |   | $ | 2.02 |   | $ | 1.38 |   | $ | 1.75 |   | $ | 1.11 |   |
|                                         |       |                                               |       |   |   |   |   |   |   |   |   |
| **Electricity:**                             |       |                                               |       |   |   |   |   |   |   |   |   |
| RCEs at period end                           | ** ** | **98,000**                                         |       | 43,000 |   | 12,000 |   | 11,000 |   | 11,000 |   |
| Average RCEs during the period               | ** ** | **68,000**                                         |       | 20,000 |   | 12,000 |   | 12,000 |   | 6,000 |   |
| MWhrs sold during the period                 | ** ** | **636,000**                                        |       | 193,000 |   | 120,000 |   | 130,000 |   | 14,000 |   |
| Sales per MWhr during the period             | ** ** | **$**                                              | **130.13** |   | $ | 119.77 |   | $ | 141.10 |   | $ | 97.69 |   | $ | 300.00 |   |
| Gross profit per MWhr during the period (1)  | ** ** | **$**                                              | **16.08**  |   | $ | 18.54 |   | $ | 32.58 |   | $ | 11.54 |   | $ |   | (2) |

 

----

(1)   Includes fee income andrealized losses from risk management activities, but excludes unrealized(gains) losses from risk management activities.

(2)   Information is not meaningfulsince it only reflects only two months of electricity sales activity for fiscalyear 2004.

 

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

 

**ExecutiveOverview**

 

Income before income taxexpense was $41.9 million for the fiscal year ended June 30, 2008, anincrease of $64.2 million from fiscal 2007. Lower gross profit from our natural gas business and higher operatingexpenses were offset by higher unrealized gains from risk management activitiesand higher gross profit from our electricity business.

 

The average number ofRCEs served for the fiscal year ended June 30, 2008 increased by 7% overthe prior year.  The increase is relatedprimarily to organic growth in electricity RCEs during the year, as well as theGasKey Acquisition in January 2008.

 

Sales of natural gas andelectricity for the fiscal year ended June 30, 2008 were $752.3 million,an increase of $48.4 million (7%) compared to the prior fiscal year.  The increase in revenue was principally dueto higher MWhr volumes sold and higher selling price per electricity MWhr.  A higher selling price per natural gas MMBtusold also contributed to the increase in sales. Contributing to the higher sales were:

 

·                  a full year’s impact of operations acquired from SESCoin fiscal 2008 (versus eleven months during the previous fiscal year);

·                  six months of activity from the GasKey operations,which were acquired in January 2008; and

·                  strong organic growth within the electricity business.

 

Increases in revenuenoted above were partially offset by warmer-than-normal weather in Georgia, theCompany’s largest natural gas market, and by normal customer attrition, whichwas partially offset by new customer growth.

 

Gross profit excludingunrealized gains and losses from risk management activities for the fiscal yearended June 30, 2008 totaled $115.5 million, a decrease of $3.3 million(3%) from the prior year.  The decreaseis primarily due to:

 

·                  lower volumes of natural gas sold during fiscal year2008; and

·                  unusually favorable market conditions for variablecontract pricing in certain natural gas markets during the winter of fiscalyear 2007, which resulted in a gross profit per MMBtu of natural gas sold forthat period that exceeded the gross profit per MMBtu sold for the same periodin fiscal year 2008.

 

Operating expensesexcluding depreciation and amortization for the fiscal year ended June 30,2008 were $73.9 million, an increase of $10.7 million (17%) from the prioryear, primarily due to:

 

·                  higher overall expenses resulting from the Company’sinvestment in an expanded operational platform to support new or expandedelectricity and natural gas markets;

·                  higher personnel-related and contractual expenses fromcontinued expansion of the Company’s internal audit function and enhancement ofthe Company’s overall internal controls environment, including costs associatedwith implementation of the provisions of the Sarbanes-Oxley Act of 2002;

·                  higher contractual and personnel-related expenses frominvestment in the Company’s information technology platform, includingintegration of legacy information systems onto systems acquired from SESCo;

·                  incremental costs associated with the assessment ofpotential purchase acquisition opportunities; and

·                  one additional month of expenses related to operationsacquired from SESCo in August 2006.

 

During fiscal 2008,approximately $3.6 million of expenses were incurred, primarily related toSarbanes-Oxley compliance and the assessment of acquisitions, which are notexpected to recur in future periods.

 

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**AdjustedEBITDA**

 

Management uses AdjustedEBITDA for various management purposes. Refer to “Item 6. Selected Financial Data” for commentary regardingmanagement’s use of Adjusted EBITDA. Significant activity affecting Adjusted EBITDA is summarized in thefollowing table.  Refer to “Results ofOperations” below for commentary regarding the changes noted in this table.

 
| ** **                                                                                      | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2008**                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                      | ** ** | **(in thousands)**                            | ** ** |
|                                                                                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Adjusted EBITDA for prior fiscal year                                                           | ** ** | **$**                                              | **60,113** |   | $ | 25,729 |   | $ | 36,283 |   | $ | 15,830 |   | $ | 8,370 |   |
| Increases (decreases) in Adjusted EBITDA due to:                                                |       |                                               |       |   |   |   |   |   |   |   |   |
| Changes in gross profit, excluding unrealized  (gains) losses from risk management activities:  |       |                                               |       |   |   |   |   |   |   |   |   |
| Natural gas                                                                                     | ** ** | **(9,977**                                         | **)**      | 66,258 |   | (8,568 | ) | 29,004 |   | 13,773 |   |
| Electricity                                                                                     | ** ** | **6,648**                                          |       | (331 | ) | 2,420 |   | 703 |   | 787 |   |
| Higher operating expenses, excluding depreciation,  amortization and stock compensation expense | ** ** | **(11,843**                                        | **)**      | (31,543 | ) | (4,406 | ) | (9,254 | ) | (7,100 | ) |
| Adjusted EBITDA for current fiscal year                                                         | ** ** | **$**                                              | **44,941** |   | $ | 60,113 |   | $ | 25,729 |   | $ | 36,283 |   | $ | 15,830 |   |

 

**RisingCommodity Prices**

 

Fiscalyear 2008 was a period of rising energy prices, particularly during the wintermonths, which had a direct impact on our business.  Cash generated from operations decreasedsignificantly, due in large part to higher working capital requirements,particularly for purchases of natural gas and electricity for delivery tocustomers, and a higher allowance for doubtful accounts.  In addition, the rising price environmentraised awareness of retail pricing options on the part of our current andpotential customers, which resulted in competitive pressure on our fixed andvariable prices and contributed to reduced gross profit for both natural gasand electricity.

 

**Acquisitionof the GasKey Division of PS Energy Group, Inc.**

 

In January 2008, wecompleted the acquisition of substantially all of the retail natural gas assetsof PS Energy Group, Inc., primarily including the natural gas customercontracts of their GasKey division. Nearly all of the customers served under such contracts are located inGeorgia.  We acquired approximately60,000 RCEs in the GasKey Acquisition. Consistent with our experience with previous acquisitions, we expectattrition for this portfolio to be higher than that experienced for customersacquired through organic growth.  Themajority of accounts acquired are commercial and industrial customers for whichwe expect to earn gross profit that is lower than that for our traditionalmass-market business.

 

Pursuant to the terms ofthe related Asset Purchase Agreement, we purchased the GasKey assets for a baseamount of approximately $4.3 million, plus working capital, plus contingentconsideration payable for volumes consumed on customer contracts acquired for a36-month period subsequent to the acquisition date.  The final purchase price is subject to certainadjustments in accordance with the terms and conditions of the Asset PurchaseAgreement.  We also assumed certainliabilities related to the GasKey assets, which is typical for this type oftransaction.

 

Regulatory approval forthe GasKey Acquisition was received in January 2008.  We recorded the transaction as a purchasebusiness combination as of January 1, 2008.  The initial purchase price of $12.0 million,prior to the adjustments noted above, was paid from our available cashbalance.  The assets acquired and relatedoperations represent less than 10% of our consolidated assets and operations,including the acquired assets.

 

Pursuant to the AssetPurchase Agreement, we assumed the economic benefit and risk associated withthe GasKey net assets effective November 1, 2007.  During the period from November 1, 2007to December 31, 2007, we extended $13.6 million of credit to PS EnergyGroup, Inc., of which $9.0 million was loaned directly to PS Energy Group, Inc.and $4.6 million represented collateral and guarantees funded by us to fulfillLDC requirements related to the GasKey business.  Also during this period, we recorded cashreceipts from accounts receivable, cash payments for natural gas inventorypurchases and other operating expenditures related to the assets acquired andliabilities assumed in the GasKey Acquisition. The $9.0 million loan to PS Energy Group, Inc. was repaid on theclosing date.

 

The allocation of thepurchase price for the GasKey Acquisition to various assets acquired andliabilities assumed is summarized in Note 4 to the consolidated financialstatements included elsewhere in this Annual Report.

 

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**BalanceSheet Overview**

 

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

 

Accounts receivable, netis summarized in the following table.

 
| ** **                                  | ** ** | **Balances at June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                | ** ** | **2007** | ** ** |
| ** **                                  | ** ** | **(in thousands)**                 | ** ** |
| Billed customer accounts receivable:        | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Guaranteed by LDCs                          | ** ** | **$**                                   | **17,085** |   | **$** | 8,721 |   |
| Non-guaranteed by LDCs                      | ** ** | **32,966**                              |       | 27,314 |   |
| ** **                                  |       | **50,051**                              |       | 36,035 |   |
| Unbilled customer accounts receivable:      |       |                                    |       |   |   |
| Guaranteed by LDCs                          | ** ** | **9,803**                               |       | 3,487 |   |
| Non-guaranteed by LDCs                      | ** ** | **19,905**                              |       | 10,268 |   |
| ** **                                  |       | **29,708**                              |       | 13,755 |   |
| Total customer accounts receivable          | ** ** | **79,759**                              |       | 49,790 |   |
| Less: Allowance for doubtful accounts       | ** ** | **(5,154**                              | **)**      | (5,259 | ) |
| Customer accounts receivable, net           | ** ** | **74,605**                              |       | 44,531 |   |
| Imbalance settlements and other receivables | ** ** | **13,068**                              |       | 3,790 |   |
| Accounts receivable, net                    | ** ** | **$**                                   | **87,673** |   | $ | 48,321 |   |
|                                             |            |                                         |            |  |  |  |  |  |  |

 

Billed customer accountsreceivable represents uncollected revenues that have been billed directly tocustomers by the Company or on the Company’s behalf by certain LDCs.  Unbilled customer accounts receivablerepresents estimated revenues associated with natural gas and electricityconsumed but not yet billed to customers under an LDC’s monthly cycle billingmethod.

 

The Company’s credit riskis limited 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 30,2008 and 2007, all of our of billed and unbilled customer accounts receivablein guaranteed markets was with LDCs who have received 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, the Company maintainsan allowance for doubtful accounts that is based upon the credit risk of itscustomers, historical trends and other information.  Refer to Note 7 of the consolidated financialstatements included elsewhere in this Annual Report for additional analysis ofthe Company’s allowance for doubtful accounts. Bad debt expense associated with non-guaranteed accounts receivable wasless than 1% for each of the fiscal years ended June 30, 2008, 2007 and2006.

 

Imbalance settlementsrepresent differences between the natural gas delivered to LDCs for consumptionby our customers and actual usage by our customers.  Such imbalances are expected to be settledwith cash from LDCs within the fiscal year following the balance sheetdate.  Imbalance settlements willfluctuate from period to period depending on the market price for natural gas,weather patterns and other factors that affect customer consumption, and thetiming of cash remittances from LDCs.  Thesereceivables are due from LDCs with investment grade credit ratings.

 

The Company operates in39 market areas located in 14 U.S. states and 2 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 region.

 

In addition, the Companyhas limited exposure to risk associated with high concentrations of salesvolumes with individual customers.  Forthe fiscal years ended June 30, 2008 and 2007, the Company’s largestcustomer accounted for approximately 2% of total sales volume.

 

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.

 

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***Customer Acquisition Costs, net***

 

We acquire customersorganically through direct marketing initiatives, through bulk acquisitions ofcustomers and through business combinations. During the fiscal year ended June 30, 2008, we recordedapproximately $26.2 million of customer acquisition costs on the consolidatedbalance sheet, including $6.6 million added from the GasKey Acquisition, whichare being amortized over their projected benefit period.  Capitalized customer acquisition costs grewsignificantly during fiscal 2008, as compared with previous fiscal years, as weshifted our marketing focus and resources during the year towards direct salesand marketing activities.  Much of thecost associated with these marketing channels were deferred as customeracquisition costs.

 

***Long-Term Debt***

 

As of June 30, 2008,we had $162.6 million of aggregate principal amount of Senior Notesoutstanding, net of unamortized discount of $2.6 million.  During the fiscal year ended June 30,2008, we acquired $12.8 million aggregate principal amount of outstandingSenior Notes from existing noteholders, resulting in a reduction of the SeniorNotes on our consolidated balance sheet. Refer to Note 15 of the consolidated financial statements includedelsewhere in this Annual Report for additional information regarding the SeniorNotes.

 

At June 30, 2007, wehad $11.0 million of principal outstanding under the Denham CreditFacility.  In January 2008, theentire outstanding principal balance of the Denham Credit Facility wasrepaid.  Refer to Note 18 of theconsolidated financial statements included elsewhere in this Annual Report foradditional information regarding the Denham Credit Facility.

 

There was no long-term orrevolving debt issued or drawn during the fiscal year ended June 30, 2008.

 

***Redeemable Convertible Preferred Stock***

 

Holdings is authorized toissue 5,000,000 shares of Series A convertible preferred stock.  On June 30, 2004, MXenergy Inc. enteredinto a purchase agreement (the “Preferred Stock Purchase Agreement”) with affiliatesof Charterhouse Group Inc. and Greenhill Capital Partners LLC (collectively,the “Preferred Investors”) to issue 1,451,310 shares of Preferred Stock at apurchase price of $21.36 per share.  In2005, as part of a corporate reorganization, MXenergy Inc. merged with and intoa subsidiary of Holdings to become a wholly owned 

subsidiary of Holdingsand stockholders of MXenergy Inc. became stockholders of Holdings.  Total related offering expenses ofapproximately $1.6 million were deducted from the carrying value of thePreferred Stock, which resulted in a net carrying value of approximately $29.4million at June 30, 2007.

 

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 may require thatwe make a redemption election.  If theholders of the Preferred Stock require us to make a redemption election, and ifwe elect to redeem the Preferred Stock, the redemption amount is payable incash equal to the greater of: (1) the fair market value of the shares of commonstock into which the Preferred Stock may be converted on the date of theredemption election notice; or (2) the original issue price of $21.36 per share,plus any accrual of dividends.  If weelect not to redeem the Preferred Stock, we are required to grant the PreferredInvestors effective control over Holding’s Board of Directors.  As of June 30, 2008, if the holders ofPreferred Stock were to request that we make a redemption election, we do nothave the intent or the ability to redeem the Preferred Stock due to limitationsincluded in the agreements that govern the Revolving Credit Facility, the HedgeFacility and the Senior Notes.  However,since the Preferred Investors would effectively control our Board of Directorsin the event that we do not elect to redeem the Preferred Stock, we havedetermined that, in accordance with U.S. GAAP, the Preferred Stock isredeemable at the option of the Preferred Investors and that it is probablethat the Preferred Stock will become redeemable at June 30, 2009.  Therefore the carrying value of the PreferredStock is recorded outside of stockholders’ equity on the consolidated balancesheets and has been adjusted to its estimated redemption value of $48.8 millionas of June 30, 2008.  Refer to Note 16 ofthe consolidated financial statements for additional information regarding thePreferred Stock.

 

**Resultsof Operations**

 

***Fiscal Year Ended June 30, 2008 Compared with FiscalYear Ended June 30, 2007***

 

***Gross Profit by Business Segment***

 

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

 
| ** **                | ** ** | **Fiscal Year Ended June 30,** | ** **  | **2008 versus 2007  Increase (Decrease)** | ** ** |
|---------------------------|------------|----------------------------------------------------|-------------|----------------------------------------------------------|------------|
| **Business Segment** | ** ** | **2008**                                           | ** **  | **2007**                                                 | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                | ** ** | **($ in thousands)**                     | ** **  | ** **                                               | ** ** |
|                      |       |                                               |        |                                                     |       |   |   |   |   |
| Natural gas               | ** ** | **$**                                              | **105,303** |                                                     | $          | 115,280 |   | $ | (9,977 | )  | (9 | ) |
| Electricity               | ** ** | **10,227**                                         |        | 3,579                                                    |       | 6,648 |   | 186 |   |
| Total gross profit        | ** ** | **$**                                              | **115,530** |                                                     | $          | 118,859 |   | $ | (3,329 | ) | (3 | ) |

 

***Natural Gas Gross Profit***

Average natural gas RCEsdecreased 7% 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.

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*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.

 

*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 offered by most local utilities, thus allowing us torealize higher gross profit on variable rate products than those realized forthe three months ended March 31, 2008. In contrast, natural gas prices increased significantly during the threemonths ended March 31, 2008, which prevented us from realizing comparablegross profit for variable rate products offered 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 former SESCo operations, 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 ofoperations for 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.

 

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*RealizedLosses from Risk Management Activities Related to Natural Gas Inventories NotYet 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 and Texas, includingmonthly service fees, late payment fees and shut-off/reconnect servicefees.  Fee income was $2.3 million higherfor the fiscal 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.

*** ***

***Electricity Gross Profit***

 

Electricity gross profit,excluding unrealized losses from risk management activities, increased $6.7million (188%) during the fiscal year ended June 30, 2008, as comparedwith the prior fiscal year.  Averageelectricity RCEs grew approximately 240% to approximately 68,000 for fiscal2008, resulting in significantly 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 customers inour Northeastern U.S. markets, where we also experienced growth, alsocontributed to lower overall gross profit per MWhr sold.

 

InSeptember 2008, Hurricane Ike caused extensive damage to the infrastructure forgenerating and delivering electricity to residential and commercial end-usersalong the eastern coast of Texas, which resulted in extended disruption ofelectricity service for Houston, Texas and the surrounding area.  We are currently assessing the impact of thisdisruption of service on our financial results for the three months endedSeptember 30, 2008.

 

***Operating Expenses***

 

Operating expenses aresummarized in the following table.

 
| ** **                          | ** ** | **Fiscal Year Ended June 30,** | ** **  | **2008 versus 2007  Increase (Decrease)** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|-------------|----------------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                           | ** **  | **2007**                                                 | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                          | ** ** | **($ in thousands)**                     | ** **  | ** **                                               | ** ** |
|                                |       |                                               |        |                                                     |       |   |   |   |   |
| General and administrative expenses | ** ** | **$**                                              | **62,271**  |                                                     | $          | 54,516 |   | $ | 7,755 |   | 14 |   |
| Advertising and marketing expenses  | ** ** | **4,546**                                          |        | 4,044                                                    |       | 502 |   | 12 |   |
| Reserves and discounts              | ** ** | **7,130**                                          |        | 4,725                                                    |       | 2,405 |   | 51 |   |
| Depreciation and amortization       | ** ** | **32,698**                                         |        | 27,730                                                   |       | 4,968 |   | 18 |   |
| Total operating expenses            | ** ** | **$**                                              | **106,645** |                                                     | $          | 91,015 |   | $ | 15,630 |   | 17 |   |

 

*Generaland Administrative Expenses*

 

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.

 

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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 ofthe restructuring charges, bonuses and compensation expense from issuance ofshares described above, general and administrative expenses increased $8.1million (15%) for the fiscal year ended June 30, 2008 as compared with theprior fiscal year.  Throughout fiscal2008, we continued various initiatives to enhance our corporate finance,billing, accounting operations, customer service, information technology,marketing and supply functions in support of business growth experienced duringfiscal 2007.  In addition, we increasedour staff 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 general expenses related toexpanding our customer billing, collections and customer services functions;

·                  Higher staffing levels, salaries, employee benefitsand recruiting fees related to enhancing our overall internal controlsenvironment for various corporate accounting and reporting functions;

·                  Higher professional fees related to supporting ourdevelopment of a formalized internal audit function and our ongoing developmentof an internal controls environment that complies with the Sarbanes-Oxley Actof 2002; and

·                  Higher information technology expenses related tobusiness growth and process improvement initiatives.  The principal objectives of these initiativesinclude the integration of legacy operations of the Company onto the customerrelationship management system that served SESCo and the implementation ofinternal controls as described above.

 

In addition, we incurredan additional month of expenses during the fiscal year ended June 30,2008, as compared to the prior fiscal year, related to the SESCo operations,which were acquired effective August 1, 2006.

 

*Advertisingand Marketing Expenses*

 

During the three monthsended September 30, 2007, we incurred significant expenses related to amulti-media campaign designed to support our direct sales activities in theGeorgia market subsequent to the SESCo Acquisition.  Multi-media marketing expenditures slowedsignificantly during the nine months subsequent to September 30, 2007after the Georgia campaign was completed.

 

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 our 

consolidated balancesheet and amortized over a three-year estimated benefit period, which resultedin lower marketing expenses and partially offset higher multi-media advertisingexpenses during the first three months of the current fiscal year.

 

*Reservesand Discounts*

 

Reserves and discounts includethe provision for doubtful accounts ($5.1 million and $3.0 million for thefiscal years ended June 30, 2008 and 2007, respectively) and contractualrevenue-based discounts to certain LDCs ($2.1 million and $1.7 million for thefiscal years ended June 30, 2008 and 2007, respectively).

 

Higher provision fordoubtful accounts for the fiscal year ended June 30, 2008 was partiallydue to higher total sales recorded for the period, and partially due to ahigher concentration of revenues and receivables in the Georgia natural gasmarkets and Texas electricity markets for which we perform the billingfunction.  In relation to sales revenue,our provision and allowance for doubtful accounts are higher in these marketsdue to historical levels of bad debts that are generally higher than that forother markets that we serve.  Theprovision for doubtful accounts was less than 1% of sales of natural gas andelectricity for each of the fiscal years ended June 30, 2008 and 2007.

 

As of June 30, 2008,we have not experienced a material change in the collectability of customeraccounts receivable as a result of weak economic conditions in any of themarkets that we serve.  We will continueto assess the adequacy of our allowance for doubtful accounts in light ofcurrent economic conditions and their impact on the ability of our customersand counterparties to remit balances to us when due.

 

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*Depreciation and Amortization*

 

Depreciationand amortization expense includes depreciation of fixed assets and amortizationof customer acquisition costs.  Expensesfor the fiscal year ended June 30, 2008 include an additional month ofdepreciation and amortization expense associated with fixed assets and customeracquisition costs from the SESCo Acquisition, which was completed on August 1,2006.  Higher balances of customeracquisition costs have also resulted in higher amortization expense.

 

*Interest Expense, net*

 

Interestexpense, net increased $1.1 million (3%) for the fiscal year ended June 30,2008, as compared with the prior fiscal year.

 

Interestexpense associated with the Senior Notes increased $4.0 million in fiscal2008.  The Senior Notes were issued inconnection with the SESCo Acquisition, which was completed in August 2006.  We incurred a full twelve months of interestexpense related to the Senior Notes during the fiscal year ended June 30,2008, as compared with eleven months of interest expense incurred during fiscal2007, which resulted in approximately $1.9 million of additional interestexpense for fiscal year 2008.

 

Weutilize interest rate swap agreements to manage exposure to interest ratefluctuations on the Senior Notes. 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 notedabove of the mark-to-market adjustments and interest on the interest rate swapsand the additional month of interest during the fiscal year ended June 30,2008, interest expense related to the Senior Notes decreased approximately $1.7million during the fiscal year ended June 30, 2008, as compared with theprior fiscal year.  The weighted-averageinterest rate on the Senior Notes decreased to 11.9462% for fiscal 2008 from12.9650% for the prior fiscal year. Lower average debt balances resulting from our purchases of Senior Notesduring fiscal 2008 and 2007 also resulted in generally lower interest expenseon the Senior Notes for fiscal 2008.

 

DuringAugust 2006, we utilized a bridge loan from two investment banks tofinance the SESCo Acquisition.  Thebridge loan was repaid with proceeds from the sale of $190.0 million aggregateprincipal amount of the Senior Notes. Fees and interest of $0.8 million associated with the bridge loan werecharged to interest expense during the fiscal year ended June 30,2007.  There was no comparable expenserecorded during the fiscal year ended June 30, 2008.

 

Wepay various fees to our hedge provider related to forward-hedged commodityvolumes under the Hedge Facility.  Thesefees are deferred in other current assets on the consolidated balance sheets,and amortized to interest expense over the period of the hedgedtransactions.  Total interest expenseassociated with these fees were approximately $1.0 million and $2.8 million forthe fiscal years ended June 30, 2008 and 2007, respectively.  Lower fees during fiscal year 2008 wereprimarily due to a lower volume of fixed hedge positions.

 

*Income Tax (Expense) Benefit*

 

Incometax (expense) benefit increased to an expense of $17.2 million for the fiscalyear ended June 30, 2008 from a benefit of $8.5 million for fiscal year2007, due to:

 

·                  the change to income before income taxexpense of $42.0 million for the fiscal year ended June 30, 2008 from aloss before income tax benefit  of $22.3million for fiscal year 2007; and

·                  a higher effective tax rate for fiscal year2008, due mainly to changes in the mix and amounts of permanent differences,which was partially offset by a lower state statutory tax rate.

 

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***Fiscal Year Ended June 30, 2007Compared with Fiscal Year Ended June 30, 2006***

 

Duringthe fiscal year ended June 30, 2007, we benefited from a period of rapidlyfalling natural gas prices during the winter of 2007.  Utilities generally react much slower than usto changes in market commodity prices. Prices offered by utilities during the quarter ended March 31, 2007were much higher than the spot price of natural gas during those months.  We were able to price our variable priceproduct below the price offered by utilities and purchase the physical naturalgas at a lower prevailing spot price, substantially increasing our gross profitper MMBtu sold related to these contracts during the quarter, which contributedheavily to higher overall gross margins for the fiscal year ended June 30,2007.

 

Theaverage number of RCEs served for the fiscal year ended June 30, 2007increased by 57% over the prior year. The increase is related primarily to the acquisition of 315,000 RCEsfrom SESCo in August 2006 and, to a lesser extent, organic growth inelectricity RCEs and to the Vantage Acquisition in May 2007.

 

Salesof natural gas and electricity for the fiscal year ended June 30, 2007 was$703.9 million, up $341.4 million (94%) compared to the prior year.  The increase in revenue was principally dueto the SESCo acquisition and, to a lesser extent, to a higher number ofelectricity customers acquired through increased marketing activities.  The average selling price per MMBtu in fiscal2007 increased over the prior year by $2.19, largely due to the higher pricefor natural gas when fixed price customers were added or renewed during theyear, and to fee income realized from certain customers acquired from SESCo.  The SESCo Acquisition also resulted in highervolumes of MMBtus of natural gas sold during fiscal 2007.  However, the overall usage per customerdecreased from the prior fiscal year as a result of warmer than normal weatherexperienced in the Midwestern and Northeastern U.S. during the six months endedMarch 31, 2007, which is the Company’s peak winter season for natural gas.

 

Grossprofit (excluding unrealized gains and losses from risk management activities)for the fiscal year ended June 30, 2007 totaled $118.9 million, up $66.0million (125%) from the prior year.  Theincrease is primarily due to the impact of the customers acquired from SESCo.

 

Operatingexpenses are summarized in the following table.

 
| ** **                          | ** ** | **Fiscal Year Ended June 30,** | ** ** | **2007 versus 2006  Increase (Decrease)** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                           | ** ** | **2006**                                                 | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                          | ** ** | **($ in thousands)**                     | ** ** | ** **                                               | ** ** |
|                                |       |                                               |       |                                                     |       |   |   |   |   |
| General and administrative expenses |       | $                                                  | 54,516     |                                                     | $          | 22,623 |   | $ | 31,893 |   | 141 |   |
| Advertising and marketing expenses  |       | 4,044                                              |       | 2,096                                                    |       | 1,948 |   | 93 |   |
| Reserves and discounts              |       | 4,725                                              |       | 3,395                                                    |       | 1,330 |   | 39 |   |
| Depreciation and amortization       |       | 27,730                                             |       | 8,504                                                    |       | 19,226 |   | 226 |   |
| Total operating expenses            |       | $                                                  | 91,015     |                                                     | $          | 36,618 |   | $ | 54,397 |   | 149 |   |

 

Higheroperating expenses during fiscal 2007, as compared with the prior fiscal year,primarily resulted from higher overall costs associated with the customers andoperations acquired from SESCo. Incremental SESCo-related costs included $1.2 million in rationalizationexpenses to transition operations to Houston, Texas and $0.8 million of bonusespaid to senior management in connection with the acquisition.  In addition, personnel-related expenses werehigher as we increased staffing levels and incurred incremental contractedexpenses to:

 

·                  improve our overall internal controlenvironment, including the segregation of duties within various operational andaccounting areas;

·                  hire a “Big four” accounting firm to becomeour internal audit service provider; and

·                  prepare, review and audit registrationstatements and periodic reports required to be filed with the SEC for fiscal year2007, which was our first year as an SEC registrant.

 

Duringfiscal 2007, approximately $4.3 million of expenses were incurred, primarilyrelated to the SESCo Acquisition and to assessment of other purchaseacquisition opportunities, which are not expected to recur in future periods.

 

Reservesand discounts include the provision for doubtful accounts ($3.0 million and$1.6 million for the fiscal years ended June 30, 2007 and 2006,respectively) and contractual revenue-based discounts to certain LDCs ($1.7million and $1.8 million for the fiscal years ended June 30, 2007 and2006, respectively).  Higher provisionfor doubtful accounts was primarily due to higher revenues and customeraccounts receivable balances resulting from the SESCo Acquisition.

 

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Forthe year ended June 30, 2007, we recorded an $8.5 million income taxbenefit compared to $27.0 million in the prior year. The decrease from theprior year is primarily attributable to the decrease in pre-tax losses betweenthe periods, of which all significant changes were previously discussed.

 

**Liquidity and Capital Resources**

 

Ourprincipal sources of liquidity for funding our ongoing operations are cash collectedfrom sales of natural gas and electricity to customers and borrowings under ourRevolving Credit Facility.  Our primaryliquidity requirements arise from obligations incurred in connection withcustomer acquisition costs, the funding of our overall seasonal working capitalneeds, including purchases of natural gas inventories, collateral requirements andongoing debt service obligations. Because we sell natural gas and electricity, we are subject to materialvariations in short-term indebtedness under our Revolving Credit Facility on aseasonal basis, due to the timing and price of commodity purchases to meetcustomer demands.

 

***Cash Flow***

 

During the fiscal year ended June 30, 2008,our cash and cash equivalents decreased $65.0 million to a balance of $72.0million at the end of the period. Approximately $8.6 million of cash was used for operating activitiesduring the period, which reflects a $97.6 million change from the $89.0 millionprovided by operations for fiscal year 2007. Of this overall decrease in cash from operating activities, $58.0million was used to fund higher accounts receivable, net and natural gasinventory, primarily due to the following:

 

·                  Our average price paid for natural gasinventory was $3.64 (48%) per MMBtu higher for the fourth quarter of fiscalyear 2008, as compared with the same period of prior fiscal year;

·                  Electricity RCEs increased approximately55,000 (128%) during fiscal year 2008 to 98,000 at June 30, 2008 due tosignificant organic growth in the northeastern U.S. and in the State of Texas; 

·                  Natural gas RCEs increased 14,000 (2%) duringfiscal year 2008 to 602,000 at June 30, 2008. As a result of the GasKey Acquisition, we are now serving more commercialand industrial customers, which have a higher usage of natural gas in thesummer months than our typical residential and small commercial customers.  Higher usage related to these customers hascontributed to an increase in customer accounts receivable and natural gasinventory balances at June 30, 2008, as compared with June 30, 2007; and

·                  During the fiscal year ended June 30, 2007,we received approximately $12 million of incremental cash related to customersacquired from SESCo that had contract terms above market rates.  No comparable incremental cash was receivedduring fiscal year 2008.  

 

The remaining $39.6 million decrease in cashfrom operating activities was primarily due to lower operating profit,excluding unrealized gains or losses from risk management activities andnon-cash expenses such as depreciation, amortization and stock compensationexpense.

 

We also used cash for the following materialinvesting and financing activities during the fiscal year ended June 30, 2008:

 

·                  $12.4 million was paid to PS Energy Group,Inc. related to the GasKey Acquisition;

·                  $19.6 million was used for investment incustomer acquisition costs;

·                  $12.0 million was used to acquire outstandingSenior Notes from existing bondholders; and

·                  $11.0 million was used to repay alloutstanding borrowings under the Denham Credit Facility.

 

***Revolving CreditFacility***

 

Weutilize our Revolving Credit Facility primarily to post letters of creditrequired to effectively operate within the markets that we serve.  As of June 30, 2008, MXenergy Inc.and MXenergy Electric Inc., as borrowers under our Revolving CreditFacility, were permitted to borrow or utilize letters of credit up to thelesser of: (1) $280.0 million; and (2) the amount of the thenapplicable borrowing base, which represents the aggregate of specific advancerates against cash, customer accounts receivable, natural gas inventory andimbalance receivables.  The expirationdate of our Revolving Credit Facility was December 19, 2008, at which timeany outstanding principal amounts would have become due.  Borrowings under our Revolving CreditFacility 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.

 

AtJune 30, 2008, the total available borrowing base under our RevolvingCredit Facility was $193.9 million, of which $147.9 million was utilized in theform of outstanding letters of credit. We did not draw any borrowings under our Revolving Credit Facilityduring the fiscal year ended June 30, 2008, and there were no cashborrowings outstanding under our Revolving Credit Facility at June 30,2008.

 

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OnSeptember 30, 2008, the agreement that governs the Revolving CreditFacility was amended and restated. The amended and restated agreement includesthe following amendments to the previous agreement:

 
| · |   | The  maturity date of the Revolving Credit Facility was extended through  July 31, 2009.                                                                                                                                                                                                         |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | The  maximum amount that the Company is permitted to borrow was reduced to $255.0  million. The amendment allows for new lenders to be added to the Revolving  Credit Facility subsequent to closing, which could increase the maximum  amount available for the Company to borrow to $280.0 million. |
| · |   | The  Company paid an upfront amendment closing fee of 0.75% of the aggregate  commitment under the Revolving Credit Facility, which will be amortized to  interest expense from October 2008 through July 2009.                                                                             |
| · |   | The  margins for base rate loans were increased by 1.00%.                                                                                                                                                                                                                                             |
| · |   | The  fee associated with issuing letters of credit was increased to 2.75% per  annum. Various other fees under the facility were also increased.                                                                                                                                                      |
| · |   | The  Company is required to borrow any available balance under the Denham Credit  Facility no later than November 7, 2008.                                                                                                                                                                       |
| · |   | The  Company may not acquire customer portfolios or operations of other companies in  excess of $100,000 without explicit approval by lenders holding a majority of  the commitments under the Revolving Credit Facility.                                                                             |
| · |   | The  maximum Average Leverage Ratio (average debt for the 12 months preceding a  reporting period, divided by adjusted EBITDA for the same period) for the  period from February 1, 2009 through the expiration date was lowered to  3.75 from 4.00.                                             |

 

InDecember 2007, the agreement governing our Revolving Credit Facility wasamended as follows:

 
| · |   | To  allow us to utilize up to $12.0 million of operating cash to acquire  outstanding Senior Notes for a price equal to or less than 100% of their face  value (see “Senior Notes” below for additional information); and                                                                                                                                                                                                                                                                                              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | To  amend a debt covenant to allow (1) a reduction of the minimum  consolidated working capital requirement from $145.0 million to $138.5  million; and (2) dollar-for-dollar adjustments to minimum consolidated  working capital for: (a) use of up to $12.0 million of cash to acquire  Senior Notes; (b) repayment of any principal balances outstanding under  the Denham Credit Facility using cash; and (c) cash provided from any  subsequent principal draws under the Denham Credit Facility. |

 

InMay 2008, the agreement governing the Revolving Credit Facility wasfurther amended, effective March 1, 2008, as follows:

 
| · |   | We  are required to maintain an average leverage ratio (e.g., average debt for  the 12 months preceding a reporting period, divided by adjusted EBITDA for  the same 12-month period) that is not allowed to exceed specified amounts for  various time periods that extend through the agreement termination date, as  defined in the agreement. The maximum ratios allowed under the agreement were  increased for the period March 1, 2008 through the termination date of  the Revolving Credit Facility as a result of the amendment. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | We  are required to maintain minimum interest coverage ratios (e.g., adjusted  EBITDA for the 12 months preceding a reporting period, divided by cash  interest expense for that same 12-month period) for various time periods that  extend through the agreement termination date, as defined in the agreement.  The minimum ratios required under the Revolving Credit Facility were  decreased for the period March 1, 2008 through August 31, 2008 as a  result of the amendment.                                                |

 

TheRevolving Credit Facility contains customary covenants that restrict certain ofour activities including, among others, limitation on capital expenditures,disposal of property and equipment, additional indebtedness, issuance ofcapital stock and dividend payments. Financial covenants under the Revolving Credit Facility include, amongothers, minimum tangible net worth, minimum working capital and interestcoverage, each as defined in the agreement that governs the Revolving CreditFacility.  The Revolving Credit Facilityalso contains customary events of default.  We were in compliance with all covenantsassociated with our debt agreements as of June 30, 2008.

 

Weare currently considering options for negotiating renewal or extension of ourRevolving Credit Facility, or for negotiating a new lending facility with newlenders.  Although we expect that we willbe able to renew, extend or replace the existing facility, no assurances can bemade that we can do so on terms that will be favorable to us in comparison withour Revolving Credit Facility or at all.

 

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***Hedge Facility***

 

Althoughwe engage in hedging activities with various counterparties for electricity, weutilize the Hedge Facility as our primary hedge facility for natural gas.  Under the Hedge Facility, we utilize NYMEXreferenced over-the-counter swaps, basis price swaps and options to hedge therisk of variability in the cost of natural gas. The Hedge Facility is secured by a first lien on customer accountsreceivable and by a second lien on substantially all other assets.  We posted an initial balance of $25.0 millionin cash collateral (obtained from proceeds from the sale of the Senior Notes)for potential negative mark-to-market changes in the value of the forward hedgeposition.  Under the Hedge Facility, wehave the flexibility to post either cash collateral or issue a letter of creditas margin for the Hedge Facility.  Priorto March 1, 2008, we were not required to post additional collateralbeyond the initial margin requirements unless our NYMEX referenced forward swaphedge positions exceeded 65,000,000 MMBtus. As a result of an amendment to the agreement governing the HedgeFacility, effective March 1, 2008, we will not be required to postadditional collateral unless our NYMEX referenced forward swap hedge positionsexceed 35,000,000 MMBtus.  At June 30,2008, our NYMEX referenced forward swap hedge positions and the unrealizedgains related to those positions totaled approximately 13,967,000 MMBtus and$43.8 million, respectively.  At June 30,2008, we posted a $25.0 million letter of credit as margin under the HedgeFacility.

 

Theagreement governing the Hedge Facility was amended in March 2008 and July 2008,as follows:

 
| · |   | In July 2008, the termination date was extended to the earlier  of August 1, 2009 or thirty days prior to expiration of the Revolving  Credit Facility. As a result of extension of the Revolving Credit Facility to  July 31, 2009, the Hedge Facility is currently due to expire on July 1, 2009.                                                                                                                                                                                                                                               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | In July 2008, the collateral requirement was amended to require  us to increase the posted amount from $25.0 million to $35.0 million if our  mark-to-market exposure under the Hedge Facility exceeds $25.0 million;                                                                                                                                                                                                                                                                                                                                  |
| · |   | Prior to March 1, 2008, we were not required to post additional  collateral beyond the initial margin requirements unless the amount of NYMEX  referenced forward swap hedge positions exceeded 65,000,000 MMBtus. As a  result of an amendment to the agreement governing the Hedge Facility,  effective March 1, 2008, we will not be required to post additional  collateral unless its NYMEX referenced forward swap hedge positions exceed  35,000,000 MMBtus. In July 2008, this limit was further reduced to  25,000,000 MMBtus.; and |
| · |   | Certain financial covenants, which are the same as those included in  the agreement governing the Revolving Credit Facility were also amended.                                                                                                                                                                                                                                                                                                                                                                                                              |

 

InSeptember 2008, we increased the letter of credit posted as margin to$35.0 million because our mark-to-market exposure exceeded $25.0 million.

 

Weare currently considering options for negotiating renewal or extension of thecurrent Hedge Facility, or for negotiating a new hedge facility with new hedgeproviders.  Although we expect that wewill be able to renew, extend or replace the existing facility, no assurancescan be made that we will be able to do so on terms that will be favorable to usrelative to the terms of our Hedge Facility or at all.

 

***Senior Notes***

 

OnAugust 4, 2006, we issued $190.0 million aggregate principal amountof Senior Notes, which mature on August 1, 2011 and bear interest at arate equal to LIBOR plus 7.5% per annum. The interest rate on the Senior Notes was 12.9006% at June 30,2007.  The interest rate was reset to12.8125% on August 1, 2007, 10.6863% on February 1, 2008 and 10.6250%on August 1, 2008.  Theweighted-average interest rate was 11.9462% and 12.9650% for the fiscal yearsended June 30, 2008 and 2007, respectively.  We have entered into interest rate swapagreements to hedge the floating rate interest expense on the SeniorNotes.  Refer to Note 8 to theconsolidated financial statements included elsewhere in this Annual Report foradditional information regarding the interest rate swaps.

 

Duringthe fiscal year ended June 30, 2007, we purchased $12.0 million aggregateprincipal amount of Senior Notes outstanding, plus accrued interest, from anoteholder for an amount less than face value. We used borrowings under the Denham Credit Facility to acquire suchSenior Notes.  This transaction resultedin a gain on early extinguishment of debt of approximately $1.0 million, whichwas recorded as a reduction of interest expense for the fiscal year ended June 30,2007.  We also recorded as additionalinterest expense $0.6 million of original issue discount and debt issuancecosts for the fiscal year ended June 30, 2007, which represents a pro rataportion of such costs that were deferred at the issuance date of the SeniorNotes.

 

Duringthe fiscal year ended June 30, 2008, we utilized cash and cash equivalentsto acquire $12.8 million aggregate principal amount of outstanding Senior Notesfrom noteholders, in each case, for an amount less than face value.  These transactions resulted in $0.8 millionof aggregated gains on the early extinguishment of debt that was recorded as areduction of interest expense for the fiscal year ended June 30,2008.  We also recorded as additionalinterest expense $0.5

 

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millionof original issue discount and debt issuance costs for the fiscal year ended June 30,2008, which represents a pro rata portion of such costs that were deferred atthe issuance date of the Senior Notes.

 

Onor before August 1, 2009, upon an equity offering, we may redeem upto 35% of the aggregate principal amount of the Senior Notes at a price equalto 100% of the principal amount, plus a premium equal to the rate per annum onthe Senior Notes outstanding on the date notice is given to redeem the SeniorNotes plus accrued and unpaid interest to the redemption date.  As of June 30, 2008, we have not givennotice of any intention to redeem any of the Senior Notes.

 

Ifa change of control, as defined in the indenture governing the Senior Notes,were to occur, we would be obligated to make an offer to purchase the SeniorNotes, in whole or in part, at a price equal to 101% of the aggregate principalamount of the Senior Notes, plus accrued and unpaid interest, if any, to thedate of purchase.  If a change of controlwere to occur, we may not have the financial resources to repay all of ourobligations under the Senior Notes. During the fiscal year ended June 30, 2008, there was no change incontrol, as defined in the indenture, which would obligate us to purchase theSenior Notes.

 

***Denham CreditFacility***

 

TheDenham Credit Facility is a $12.0 million line of credit that bears interest at9% per annum.  In December 2007, theagreement governing the Denham Credit Facility was amended to allow us to makeprincipal draws until November 14, 2008. In January 2008, we repaid the entire $11.0 million outstandingprincipal balance of the Denham Credit Facility.  The termination date for the Denham Credit Facilityis May 19, 2010, at which time any outstanding principal balance willbecome due as of June 30, 2008, no amounts were outstanding under the DenhamCredit Facility.

 

Inaccordance with the amended and restated agreement that governs our RevolvingCredit Facility entered into on September 30, 2008, we are required to borrowany available balance under the Denham Credit Facility prior to November 7,2008, and to maintain such balance outstanding until the Revolving CreditFacility expires on July 31, 2009.  InSeptember 2008, we borrowed the entire $12.0 million balance availableunder the Revolving Credit Facility.

 

***RedeemableConvertible Preferred Stock***

 

Atany time on or after the fifth anniversary of the issuance of the PreferredStock, we may redeem all, but not less than all, of the outstanding sharesof Preferred Stock with cash if, as of the date notice of redemption is given,the fair market value of our common stock is at a level that would provide anannual rate of return of not less than 40%, compounded annually, to themajority of the Preferred Investors.  Theredemption price would be equivalent to the fair market value of our commonstock on the redemption date.

 

Onor after the fifth anniversary of the issuance of the Preferred Stock, if thefair market value of our common stock is at a level that would not provide thePreferred Investors with an annual rate of return of at least 25%, compoundedannually, for the five-year period ending June 30, 2009, the PreferredInvestors may require that we make a redemption election.  If we elect to redeem the Preferred Stock,the redemption amount is payable in cash equal to the greater of: (1) the fairmarket value of the Shares of common stock into which the Preferred Stock maybe converted on the date of the redemption election notice; or (2), theoriginal issue price of $21.36 per share, plus any accrual of dividends ordividends in arrears.  However, ourability to redeem the Preferred Stock is limited by debt covenants and otherprovisions of the agreements governing the Hedge Facility, the Revolving CreditFacility and the Senior Notes.  We areunlikely to have the available liquidity to redeem the Preferred Stock forcash.  Therefore, we do not intend toelect to redeem the Preferred Stock if requested to make such election by thePreferred Investors.

 

Ifwe elect not to redeem the Preferred Stock, we are required to grant effectivecontrol of our Board of Directors to the Preferred Investors.  With this effective control over our Board ofDirectors, the Preferred Investors could attempt to cause us to redeem thePreferred Stock.  However, as notedabove, our ability to redeem the Preferred Stock is limited by variousagreements and by a probable lack of liquidity necessary to redeem thePreferred Stock for cash.  Therefore,management does not believe that redemption is probable if the PreferredInvestors are granted effective control over our Board of Directors without asubstantial new equity investment to provide adequate liquidity to do so.

 

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***Agency Credit Ratings***

 

Ourcredit ratings as of June 30, 2008 are summarized in the following table.

 
| ** **       | ** ** | **Standard  & Poor’s** | ** ** | **Moody’s  Investors  Service** | ** ** |
|------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
|             |       |                                 |       |                                 |       |
| Corporate Rating |       | B                                    |       | B3                                   |       |
| Senior Notes     |       | CCC+                                 |       | Caa1                                 |       |
| Ratings outlook  |       | Negative                             |       | Stable                               |       |

 

InMay 2008, Standard & Poor’s downgraded our ratings outlook to ‘Negative’from ‘Stable’, due principally to a decline in Adjusted EBITDA and its impacton certain debt covenants.  AlthoughMoody’s Investors Service did not revise their ratings for us during fiscalyear 2008, they have notified us that we are likely to be reviewed in theupcoming months.

 

Ourcredit ratings are subject to further review, revision or withdrawal at anytime by any rating agency if, in its judgment, circumstances so warrant.  If the rating agencies downgrade or withdrawour ratings, our access to capital markets could be significantly limited andour costs of borrowing, including the interest rate for future financings, mayincrease.

 

**Summary of Contractual Obligations**

 

Thefollowing table discloses aggregate information about our contractualobligations and commercial commitments as of June 30, 2008:

** **
| ** **                                     | ** ** | **Contractual Obligation Amounts Maturing In** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Less Than  1 Year**                                    | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                                     | ** ** | **(in millions)**                                             | ** ** |
|                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Floating Rate Senior Notes due 2011 (1)        |       | $                                                                  | —     |   | $ | 165.2 |   | $ | — |   | $ | — |   | $ | 165.2 |   |
| Hedge Facility (2)                             |       | 1.2                                                                |       | .2 |   | — |   | — |   | 1.4 |   |
| Operating leases                               |       | 1.0                                                                |       | 1.0 |   | 0.4 |   | 1.1 |   | 3.5 |   |
| Natural gas physical purchase commitments  (3) |       | 92.4                                                               |       | 3.9 |   | — |   | — |   | 96.3 |   |
| Electricity physical purchase commitments  (3) |       | 11.0                                                               |       | 3.4 |   | — |   | — |   | 14.4 |   |
| Total                                          |       | $                                                                  | 105.6      |   | $ | 173.7 |   | $ | 0.4 |   | $ | 1.1 |   | $ | 280.8 |   |

 

----

| (1) | Amount  excludes $2.6 million of original issue discount and annual interest expense,  which averaged approximately $21.0 million for both of the fiscal years ended  June 30, 2008 and 2007.                                                                                                                                                             |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Amount  represents monthly facility management fees.                                                                                                                                                                                                                                                                                                           |
| (3) | 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, 2008 for  all corresponding delivery months. |

 

Amountsin the table exclude any amounts that may be payable to the Preferred Investorsif a redemption were to occur on or after June 30, 2009 because the timingand amount of any such redemption is not certain as of June 30, 2008. Refer toNote 16 to our consolidated financial statements included elsewhere in thisAnnual Report for additional information regarding Preferred Stock.

 

Alsoexcluded from the table is $12.0 million borrowed under our Denham CreditFacility in September 2008.  Allamounts outstanding under the Denham Credit Facility are due in May 2010.

 

Inaddition, we are required to provide collateral in the form of cash or lettersof credit related to activity under our Hedge Facility, commodity supplieragreements, transportation and storage arrangements.  At June 30, 2008, we posted a $25.0million letter of credit as collateral under our Hedge Facility, $77.3 millionof letters of credit as collateral under various supplier agreements and $45.6million of letters of credit under various transportation and storageagreements.  As of June 30, 2008,all outstanding letters of credit were scheduled to mature during fiscal 2009.

 

**Off-Balance Sheet Arrangements**

 

Wedid not have any off-balance sheet arrangements as of June 30, 2008 or2007.

 

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**Critical Accounting Policies**

 

Thepreceding discussion and analysis of our financial condition and results ofoperating results are based on our consolidated financial statements, whichhave been prepared in conformity with U.S. GAAP.  The significant accounting policies used inthe preparation of our consolidated financial statements are more fullydescribed in Note 2 of the consolidated financial statements included elsewherein this Annual Report.

 

Manyof our significant accounting policies require complex judgments to estimatevalues of assets and liabilities.  Inmaking these judgments, management must make certain estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expenses.  Because changes in such estimates andassumptions could significantly affect our reported financial position and resultsof operations, detailed policies and control procedures have been establishedto ensure that valuation methods, including judgments made as part of suchmethods, are well controlled, independently reviewed, and are appliedconsistently from period to period.

 

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

 

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

 

***Revenue Recognition***

 

Werecognize revenue from the sale of natural gas and electricity in the period inwhich the commodity is consumed by customers. Our customers are billed monthly on various dates throughout themonth.  We accrue for revenues applicableto gas 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 inprevious estimates is reflected in operations during the period that the changeis determined.  Revenue recognition isconsidered to be a critical accounting policy due to the following factors:

 
| · |   | Volume  estimates are dependent upon projected weather conditions, which in turn are  based upon historical temperature trends. Actual weather conditions 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***

 

Weassume the credit risk associated with non-payment by our customers in marketswhere LDCs do not guarantee the customer accounts receivable.  In those markets, we record an allowance fordoubtful accounts based on the age of accounts receivable, customer paymenthistory, past loss experience and current market conditions.  We recognize that there is a high degree ofsubjectivity and imprecision inherent in the process of estimating futurecredit losses that are based on historical trends and customer data.  Critical factors that could impact therecorded level of allowances for doubtful accounts include:

 

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

·                  Higher concentrations of our business incertain markets, such as Georgia and Texas, which could expose us to higherlosses if economic conditions in those specific markets were to deteriorate.

 

Weare also subject to credit risk associated with the creditworthiness of LDCsthat guarantee customer accounts receivable balances.  Although the LDCs that guarantee our customeraccounts receivable have investment grade credit ratings, 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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***Goodwill***

 

Goodwillis not amortized, but is reviewed for impairment at least annually or morefrequently if events or changes in circumstances indicate that the carryingamount may not be recoverable.  Goodwillis tested for impairment during the fourth quarter of our fiscal year.  We utilize a discounted cash flow methodologyfor our impairment testing, which gives consideration to significant andlong-term changes in industry and economic conditions as primary indicators ofpotential impairment.

 

Goodwillof $3.8 million on our consolidated balance sheet represents the excess ofpurchase price over the fair value of identifiable net assets acquired fromSESCo in August 2006.   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.  It is our current policy to conduct a formaltest for impairment of goodwill using an annual testing date of June 30.

 

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

 

Forthe purpose of testing for goodwill impairment, we have elected to use avaluation technique that is based on a multiple of earnings.  The fair value of our natural gas net assetsare calculated using a similar earnings forecasting model as that used for ourannual forecast and for our common stock valuation model.  Critical assumptions used for the fair valuemodel, include:

 

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

·                  Expected natural gas gross profit per MMBtusold;

·                  Expense trends; and

·                  The discount rate to calculate the presentvalue of future earnings.

 

Weconducted our initial annual goodwill impairment test as of June 30, 2008,and have concluded that there was no impairment of goodwill as of that date.

 

***CustomerAcquisition Costs, net***

 

Customeracquisition costs are comprised of: (1) customer contracts acquiredthrough bulk acquisitions and business combinations; and (2) direct salesand advertising 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.

 

Customeracquisition costs are capitalized and generally amortized over the estimatedlife of a customer, which we currently 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 the following:

 

·                  A significant decrease in the market value ofan acquired asset;

·                  A significant change in the extent or mannerin which the asset is used, or a significant change in its physical condition;

·                  A significant adverse change in the legalfactors or in the business climate that could affect the value of the asset,including an adverse action or assessment by a regulator;

·                  An accumulation of costs significantly inexcess of the amount originally expected to acquire the asset;

·                  A current period operating or cash flow losscombined with a history of operating or cash flow losses or a projection ofcontinued loss;

·                  A current expectation that, more likely thannot, the asset will be sold or otherwise disposed of significantly before theend of its previously estimated useful life.

 

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

 

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

 

Asa result of all quarterly reviews conducted for the fiscal year ended June 30,2008, we have concluded that there was no impairment to the carrying value ofcustomer acquisition costs recorded on our consolidated balance sheets.

 

***Income Taxes***

 

Thecalculations of income tax expense and related balance sheet amounts involve ahigh degree of management judgment regarding estimates of the timing andprobability of recognition of revenue and deductions by taxingauthorities.  In assessing the likelihoodof realization of deferred tax assets, management considers estimates of theamount and character of future taxable income. 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; and

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

 

Inmanagement’s opinion, adequate reserves have been recorded for any future taxesthat may be owed as a result of examination by any taxing authority.  Refer to Note 12 of the consolidatedfinancial statements, included elsewhere in this Annual Report, for additionalinformation regarding tax matters.

 

***Derivatives***

 

Weutilize both physical and derivative financial instruments to reduce ourexposure to fluctuations in the price of natural gas and electricity.  Settlements on derivative financialinstruments are realized on a monthly basis, generally based upon thedifference between the contract price and the settlement price as quoted onNYMEX or other published indices.  Allderivative financial instruments are carried on the balance sheet at fairvalue.  Any changes in fair value areadjusted through unrealized losses (gains) from risk management activities inthe consolidated statements of operations. This accounting results insignificant volatility in earnings due to the impact market prices have on themarket positions and financial instruments that we have entered into.  In determining the fair value of derivativefinancial instruments, we use quoted market prices whenever possible.  As of June 30, 2008, less than 1% of thenotional values of all derivative financial instruments outstanding were valuedusing non-quoted prices.

 

Ifquoted market prices are not available, quotes from third party brokers orinternally-developed pricing models that are based on various assumptions andmanagement judgment are used.  Althoughthe total notional value of these instruments is not material at June 30,2008, the assumptions used for these pricing models are considered to becritical estimates due to the high level of management judgment utilized intheir development.

 

Wehave implemented risk management controls and limits to monitor our riskposition related to derivatives and to ensure that hedging performance is inline with agreed-upon objectives (refer to “Item 7A. Quantitative andQualitative Disclosures About Market Risk”).

 

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***Redeemable ConvertiblePreferred Stock***

 

Theholders of Preferred Stock have rights, subject to certain limitations, forredemption of their Preferred Stock, for conversion of their Preferred Stockinto common stock, or to receive dividends. Under certain circumstances, the appropriate redemption, conversion anddividend amounts are dependent upon the fair value of our common stock.  Because our common stock is not publiclytraded, we obtain an independent valuation for the 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 of our common stock using aninternally developed model that approximates the independent model.  The models used to calculate the fair valueof our common stock are considered to be critical accounting estimates becausethe assumptions used involve a high degree of subjectivity and are based on historicalexperience and internal forecasts of future results.  Actual results in future periods may notnecessarily approximate historical experience or forecasts.

 

Becauseour common stock is not publicly traded and we have limited historical stockprice data, expected stock price volatilities used in the common stockvaluation models are estimated based on historical realized volatilities ofcomparable publicly traded company stock prices over a period of timecommensurate with the expected term of the option award.

 

***Stock-BasedCompensation***

 

Wecurrently have three stock-based compensation plans in effect, under whichwarrants and options have been granted to employees, non-employees anddirectors.  We use theBlack-Scholes-Merton option-pricing model for estimating the fair value ofawards granted after June 30, 2006. The Black-Scholes-Merton option-pricing model was developed for use inestimating the fair value of traded options which have no vesting restrictionsand are fully transferable.  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.

 

Forawards of warrants and options granted prior to July 1, 2006, expenserecorded in our statements of operations may fluctuate from reporting period toreporting period based upon the calculated fair value of our common stock.  Because our common stock is not publiclytraded, we use valuation models to calculate fair value.  Refer to “Redeemable Convertible PreferredStock” above for commentary regarding the models used to calculate the fairvalue of our common stock.

 

Becauseour stock options and warrants have characteristics significantly differentfrom those of traded options, and because changes in the subjective assumptionsused in the valuation models can materially affect fair value estimates, theexisting models do not necessarily provide a reliable single measure of thefair value of our stock options.

 

**New Accounting Pronouncements**

 

***AccountingPronouncements Adopted During the Fiscal Year Ended June 30, 2008***

 

InJune 2006, the Financial Accounting Standards Board (the “FASB”) issuedFASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–aninterpretation of FASB Statement No. 109” (“FIN No. 48”).  FIN No. 48 establishes threshold andmeasurement attributes for financial statement recognition and measurement oftax positions taken or expected to be taken in a tax return.  FIN No. 48 also provides guidance onde-recognition of a previously recognized tax position, classification,interest and penalties, accounting in interim periods, disclosure andtransition.  We adopted the provisions ofFIN No. 48 effective July 1, 2007. The adoption of FIN No. 48 did not have a material impact on ourfinancial position or results of operations (refer to Note 12 to theconsolidated financial statements included elsewhere in this Annual Report).

 

***AccountingPronouncements Not Yet Adopted as of June 30, 2008***

 

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards 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 intend to adopt the provisions of SFAS No. 157effective July 1, 2008.  We arecurrently evaluating the impact that SFAS No. 157 will have on ourfinancial position, results of operations and financial statement disclosures.

 

InFebruary 2007, the FASB issued Statement of Financial Accounting StandardsNo. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”(“SFAS No. 159”), which creates an alternate measurement method forcertain

 

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financialassets and liabilities.  SFAS No. 159permits entities to elect fair value measurement for both the initial andsubsequent measurements of certain financial assets and liabilities, generallyon an 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 intend to adopt the provisions of SFAS No. 159effective July 1, 2008.  We arecurrently evaluating the provisions of SFAS No. 159 to determine whetherwe will adopt the fair value option for any financial instruments.

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 141(R), “Business Combinations” (“SFAS No. 141(R)”).  SFAS No. 141(R) establishesprinciples and requirements for an acquiring company to recognize and measurein its financial statements the identifiable assets acquired, liabilitiesassumed, goodwill acquired, any gain from a bargain purchase, and anynoncontrolling interest in an acquired company. In addition, SFAS No. 141(R) provides guidance for disclosuresrelating 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.  Early adoption is not permitted.

 

Inaddition, also in December 2007, the FASB issued Statement of FinancialAccounting Standards No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements – An Amendment of ARB No. 51” (“SFAS No. 160”).  SFAS No. 160 establishes accounting andreporting standards for ownership interests in subsidiaries held by partiesother than the parent, for changes in a parent’s ownership interest while theparent retains its controlling financial interest in a subsidiary, and for anyretained noncontrolling equity investment by a parent when a subsidiary isdeconsolidated.  SFAS No. 160 iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. Early adoption is not permitted.

 

Weare currently evaluating the provisions of SFAS No. 141(R) and SFAS No. 160to determine their likely impact on our accounting and reporting foracquisitions, if any.

 

InMarch 2008, the FASB issued Statement of Financial Accounting Standards No. 161,“Disclosures about 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 uses derivativeinstruments; 2) how derivative instruments and related hedged items areaccounted for under U.S. GAAP; and 3) how derivative instruments and relatedhedged items affect a company’s financial position, financial performance andcash flows.  SFAS No. 161 must beapplied prospectively for fiscal years and interim periods beginning after November 15,2008.  We intend to apply the provisions of SFAS No. 161 beginning January 1,2009.  We are currently evaluating theimpact that adoption of SFAS No. 161 will have, if any, on our financialstatement disclosures.

 

InMay 2008, the FASB issued Statement of Financial Accounting Standards No. 162,“The Hierarchy 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.  Any effect of applying theprovisions of SFAS No. 162 shall be reported as a change of accountingprinciple in accordance with FASB Statement of Financial Accounting Standards No. 154,“Accounting Changes and Error Corrections.” SFAS No. 162 will become effective 60 days following the SEC’sapproval of related amendments to Public Company Accounting Oversight Boardguidelines.  The adoption of SFAS No. 162is not expected to have any impact on our financial position or results ofoperations.

 

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**Risk Management**

 

***Overview***

 

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

 
| · |   | Timely  identification of various risks associated with our business;                                                                                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | Assessment  of potential costs that can be considered in relation to expected rewards  from taking such risks;                                                                          |
| · |   | Development  and/or acquisition of adequate protections against identified risks;                                                                                                       |
| · |   | Appropriate  monitoring and disclosure of risks to all concerned parties; and                                                                                                           |
| · |   | Development  of adequate staff training programs regarding compliance with relevant laws,  regulations, internal policies and procedures and established systems of  internal controls. |

 

Riskmanagement oversight begins with our Board of Directors and its variouscommittees, principally the Audit Committee and the Risk OversightCommittee.  The Audit Committee consistsof three members of the Board of Directors and is chaired by an independentdirector.  The Audit Committee meetsregularly and has overseen the strengthening of our internal audit function andour internal financial control environment over the past two fiscal years.  The Audit Committee also meets with ouroutside auditors shortly after the end of each quarterly and year-end reportingperiod and reviews and approves all financial reports filed with the SEC.

 

TheRisk Oversight Committee is primarily responsible for oversight of our processfor identifying and mitigating risks associated with acquiring natural gas andelectricity commodities for distribution to our customers (refer to “MarketRisk Management” below for further discussion).

 

***Market RiskManagement***

 

Marketrisks relating to our operations result primarily from changes in commodityprices and interest rates.  In the normalcourse of business, we also have limited credit risks associated with ourability to collect from derivative counterparties and collect billed accountsreceivable from customers and LDCs.

 

TheRisk Oversight Committee is chaired by an independent director, and includesanother member of the Board of Directors as well as the Company’s ChiefExecutive Officer (“CEO”), Chief Financial Officer (“CFO”), Chief OperatingOfficer (“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 commodity hedging.  Risk management policies are reviewed atleast annually to ensure that material risks associated with new products,asset acquisitions, current market and other changes in our risk profile areadequately addressed.  The Risk OversightCommittee reports to the Board of Directors on a quarterly basis as to thestatus of the risk management activities and positions.  We have an independent risk managementdepartment that is responsible for monitoring and enforcing risk managementpolicies related to commodities hedging activities.

 

Referto “Item 7. Quantitative and Qualitative Disclosures about Market Risks” foradditional commentary regarding market risks.

 

***Liquidity Risk Management***

** **

Liquidity risk is the risk that we would be unable to meet ourobligations as they become due or unable to fund business growth because of aninability to liquidate assets or obtain adequate funding.  Under the oversight of the Audit Committee,liquidity is managed by the CFO to provide the ability to generate cash to fundcurrent operating, investing and financing activities and to manage the cost ofpurchases of natural gas and electricity at a reasonable cost in a reasonableamount of time, while maintaining routine operations and marketconfidence.  The following strategies andprocesses are utilized to manage liquidity:

 

*·**      Utilize the Hedge Facility toreduce the impact of volatile commodity prices –* We have a risk managementpolicy that is intended to reduce our financial exposure related to changes inthe price of natural gas and electricity. Under this policy, we hedge all anticipated natural gas and electricitycommodity purchases required to meet expected customer demand for all accountsserved under fixed price contracts. Although the Company engages in hedging activities with variouscounterparties for electricity, the Company utilizes the Hedge Facility as itsprimary natural gas hedge facility. During fiscal year 2008, we extended our Hedge Facility to cover ourhedging activities through the end of Fiscal Year 2009.  

 

·      *Utilize the Revolving Credit Facility to provide liquidity foroperating requirements* – In September 2008, we extended ourRevolving Credit Facility through July 31, 2009.  As a result, we have a ready source ofliquidity, primarily in the form of letters of credit used for collateral to beplaced with hedge counterparties, commodity suppliers and providers oftransportation and storage services. Management believes that the Revolving Credit Facility is adequate to supplementcash provided from operations for funding our operational liquidity needs forfiscal year 2009.

 

·*      Maximize pricingopportunities within the markets that we serve*– Our ability todevelop products and prices that are competitive within the markets we serve,and to tailor our marketing activities to the optimal mix for various markets,while maintaining a reasonable gross profit per MMBtu or MWhr sold, is crucialto our overall financial success as well as our liquidity position.  

 

·      *Maximize cash collectionsfrom customers and LDCs –* During fiscal year 2008, approximately 44%of our 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 ofJune 30, 2008, we do not maintain an allowance for doubtful accounts againstreceivables from these LDCs as we have not experienced any material creditlosses related to these receivables.  

 

For customeraccounts receivable that are not guaranteed by LDCs, we have processes andinformation systems in place that are designed to ensure that appropriateamounts are billed and collected from our customers on a timely basis.  

 

We are continuously identifying and addressing opportunities to improvethe processes and systems that support all of the liquidity managementinitiatives noted above.  

 

Refer to “Liquidity and Capital Resources” above for commentaryregarding significant cash flow and other liquidity activity during the fiscalyear ended June 30, 2008.

 

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***Operational and Compliance RiskManagement***

 

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

 

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

 

Underthe general oversight of our Board of Directors, CEO, COO, CFO and EVP,operational and compliance risks are directly managed within the followingfunctional areas of the organization:

 
| · |   | Regulatory  affairs;                                                                                                                                                 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | Marketing  and sales;                                                                                                                                                |
| · |   | Contract  pricing;                                                                                                                                                   |
| · |   | Natural  gas supply;                                                                                                                                                 |
| · |   | Electricity  supply;                                                                                                                                                 |
| · |   | Customer  Operations (including billing activities, quality assurance activities  related to various marketing programs and management of customer  communications); |
| · |   | Compliance;                                                                                                                                                          |
| · |   | Financial  and tax reporting;                                                                                                                                        |
| · |   | Legal  counsel; and                                                                                                                                                  |
| · |   | Human  Resources and payroll.                                                                                                                                        |

 

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

 

*Fraud Risk*

 

Duringthe fiscal year ended June 30, 2008, we developed and implemented a formalfraud risk assessment program, which is designed to facilitate:

 
| · |   | identification of potential fraud risks;                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | design of internal controls to address and/or mitigate the fraud  risks identified;                                                             |
| · |   | periodic reviews of controls for effectiveness; and                                                                                             |
| · |   | monitoring of corporate activities and formal reporting of potential  incidents, if necessary, to senior management and the Board of Directors. |

 

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

 

*Information Systems*

 

Wemaintain a number of information systems for capturing customer, accounting,supply forecasting and risk management information.  Prior to fiscal 2007, these systems wereoperating on hardware within all of our four offices in Connecticut, Maryland,New Jersey and Texas.  The vast majorityof these systems are hosted at an offsite data center in Houston, Texas.  During fiscal year 2008, in conjunction withour hosting provider, we launched an initiative to modernize our key serverinfrastructure to further increase reliability and supportability, and to reduceredundancy.

 

Duringfiscal 2008, we continued to consolidate our multiple existing customerrelationship management tools and multiple billing platforms.  As of June 30, 2008, more than 70% ofour customers had been consolidated into our primary strategic systems.** **Weare also continuing to convert our demand forecasting and risk managementoperations to new or enhanced third party software systems.  We are currently utilizing these systems andwill continue to make enhancements during fiscal 2009.

 

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Weperform daily backup of our key servers and maintain backup tapes for a periodof four weeks before they are overwritten. We also perform a month-end backup of key servers and keep such data fora period of six months to one year. All backup tapes are rotated offsite at asecure storage facility on a weekly basis.

 

Wecurrently replicate our email and various other production servers to ensureavailability of our critical systems.  Weare in the process of increasing this functionality to additional servers.  Our managed hosting facility in Houston,Texas maintains 24/7 security and has stand-alone power generation to keep thedatacenter functional in the case of an extended power outage.

 

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

 

Ourwebsite has been custom-developed by an outsourced marketing company and ishosted offsite.  A full-time employee ofthe Company serves as our webmaster.

 

***Business Continuity Planning***

 

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

 

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**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**Commodity Price Risk**

 

Commodityprice risk is the risk of exposure to fluctuations in the price of natural gasand electricity.  Because our contractsrequire that we deliver full commodity requirements to 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 weather changes, we may have to buy orsell additional volumes, and therefore may be exposed to price volatility.   We utilize various hedging strategies inorder to mitigate the risk associated with potential volumetric variability ofour monthly deliveries for fixed priced customers.

 

Weutilize NYMEX-referenced swaps and basis swaps as well as physical hedges andphysical basis hedges to offset price risk associated with volume commitmentsunder fixed price contracts or variable price contracts where the price to thecustomer must be established ahead of the index settlement.  The financial swaps are generally settledagainst each month’s last trading day’s closing price for natural gas listed onthe NYMEX Henry Hub futures contract. The financial basis swaps are typically settled against the first of themonth published index prices at various trading points that relate to locationswhere we have customer obligations. Physical basis swaps are priced based on NYMEX last day settle plus orminus an agreed upon premium or discount. All of the natural gas swaps we have executed have been done over-the-counteron a bilateral basis under the Hedge Facility or with other credit-worthycounterparties.  We also enter intofinancial swaps with other counterparties in order to meet fixed and variableprice obligations. These are settled based on each ISO index price.  We only execute financial swaps with entitieswith investment grade credit ratings.  Asof June 30, 2008, our hedge positions extend through June 2011.

 

Wehave adopted a risk management policy to measure and limit market risk andcredit risk associated with our customer portfolio.  The risk policy requires that we maintain abalanced position at all times and does not permit speculative trading.  None of our employees are compensated on thebasis of his or her trading gains.  Inmarketing fixed price products to residential and small commercial customers,we hedge in advance up to four weeks of anticipated contract sales (adjusted toreflect attrition).  When marketing tolarger commercial accounts, the hedge is executed at the time of the contractsale.  Our current risk policy requiresthat the following exposures be promptly mitigated: (1) any natural gasposition exposure in excess of $1.0 million for more than one day be broughtback in compliance within one business day; and (2) any electricityposition exposure in excess of $250,000 behind any ISO for more than one day bebrought back in compliance within one business day.

 

Inorder to address the potential volume variability of future deliveries, weutilize various hedging strategies to mitigate our exposure.  For natural gas, hedging tools mayinclude:  (i) over-hedging wintervolume obligations in certain markets by up to 10% in order to provide priceand volume protection resulting from unexpected increases in demand or bypurchasing calls; (ii) utilizing gas in storage to offset variability inwinter demand; (iii) entering into daily swing contracts for some or allof the 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 customerattrition in excess of that historically experienced.  For electricity, hedging tools include: (i) over-hedgingsummer on-peak volume obligations by up to 10% in order to provide price andvolume protection from unexpected increases in demand; (ii) entering intoload shape hedges to cover the inherent imbalance from a normal consumptioncurve that a block hedge creates; and (iii) purchasing put options toprotect against falling prices if unused volume needs to be sold and to protectagainst customer attrition in excess of that historically experienced.

 

Weutilize an internally developed modified variance/co-variance “value-at-risk,”or VAR, model to estimate a maximum potential loss in the fair value of ournatural gas portfolio.  For our VARmodel, we utilize the higher of 10-day and 30-day NYMEX volatility on a 2standard deviation basis and (95.45% confidence level).  Using this VAR model, the estimated average, maximumand minimum potential loss in the fixed price natural gas portfolio using ouractual net open position at the end of any month during the fiscal year ended June 30,2008 were approximately $102,000, $366,000 and $7,000, respectively. Theestimated average, maximum and minimum potential losses in the fixed price naturalgas portfolio using our actual net open position at the end of any month duringfiscal year 2007 were approximately $178,000, $548,000 and $53,000,respectively.

 

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**Credit Risk**

 

Weare exposed to credit risk in our risk management activities.  Credit risk is the risk of loss resultingfrom the nonperformance by a counterparty of its contractual obligations.  Our fixed price positions are executed underagreements that include master netting arrangements, which mitigate outstandingcredit exposure.  Under our HedgeFacility, our risk management activities are with anAA-/Aa2 rated financial institution.  Tothe extent we purchase financial hedges or physical commodity from othercounterparties, our risk policy provides for ongoing financial reviews,established credit limits as well as monitoring, managing and mitigating creditexposure.

 

Wealso are exposed to credit risk in our sales activities.  As of June 30, 2008, approximately 56%of our total sales of natural gas and electricity was within markets where LDCsdo not guarantee customer accounts receivable while 44% of our total sales waswithin markets where LDCs guarantee customer accounts receivable at a weightedaverage discount rate of approximately 1%. Such discount is the cost of service 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.  As of June 30, 2008, all of our accountsreceivable in guaranteed markets were with LDCs with investment grade creditratings.  We record a provision fordoubtful accounts for the estimated total revenue that is not expected to becollected from customers in non-guaranteed markets.  For both of the fiscal years ended June 30,2008 and 2007, the provision for doubtful accounts represented less than 1% oftotal sales of natural gas and electricity.

 

Weperiodically review payment history, credit ratings and financial informationfor LDCs to ensure that we identify and respond to any deteriorating trends.

 

**Interest Rate Risk**

 

Weare exposed to fluctuations in interest rates under our Revolving CreditFacility.  Effective August 4, 2006,we also became exposed to fluctuations in interest rates under the SeniorNotes.  As of June 30, 2008, $162.6million aggregate principal of the Senior Notes was outstanding, net oforiginal issue discount.  In anticipationof issuing the Senior Notes, we entered into interest rate swap agreementsduring fiscal 2007.  Such interest rateswap agreements are utilized to manage our exposure to interest ratefluctuations on the Senior Notes.  Theseagreements effectively convert interest rate exposure from a variable rate to afixed rate of interest.  As of June 30,2008, the following interest rate swaps were outstanding:

 
| · |   | a $50.0 million swap that expired on August 1, 2008;     |
|--------|--------|---------------------------------------------------------------|
| · |   | a $30.0 million swap that expires on August 2, 2010; and |
| · |   | an $80.0 million swap that expires on August 1, 2011.    |

 

Allswaps are fixed-for-floating and settle against the six-month LIBOR rate.  None of these 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 $3.3 million and$0.9 million for the fiscal years ended June 30, 2008 and 2007,respectively.

 

Ouraverage, high and low month-end balances for the Senior Notes during fiscalyear 2008, which bears interest at variable rates, net of the effects of theinterest rate swaps, were approximately $42.0 million, $48.0 million and $35.2million, respectively. Based on the average outstanding amount of our variablerate indebtedness under the senior notes during the fiscal years ended June 30,2008 and 2007, a one percentage point change in the interest rates, net of theeffects of the interest rate swaps, would have impacted our annual interestexpense by approximately $0.3 million and $0.5 million, respectively.  Based on the average outstanding amount ofvariable rate indebtedness expected for the fiscal year ending June 30,2009, a one percentage point change in the interest rates would impact fiscal2009 interest expense by approximately $0.5 million, net of the effects ofthe interest rate swaps.

 

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

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND CONSOLIDATEDFINANCIAL STATEMENTS**

 
| ** **                                                                                                  | ** ** | **Page** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                        |       |     |
| Report of Independent  Registered Public Accounting Firm                                                    |       | 59       |
| Consolidated Balance Sheets at  June 30, 2008 and 2007                                                 |       | 60       |
| Consolidated Statements of  Operations for the years ended June 30, 2008, 2007 and 2006                |       | 61       |
| Consolidated Statements of  Stockholders’ Equity for the years ended June 30, 2008, 2007 and 2006 |       | 62       |
| Consolidated Statements of  Cash Flows for the years ended June 30, 2008, 2007 and 2006                |       | 63       |
| Notes to  Consolidated Financial Statements                                                                 |       | 64       |

 

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**Report ofIndependent Registered Public Accounting Firm**

 

The Board of Directors and StockholdersMXenergy Holdings Inc.

 

We have audited the accompanying consolidated balancesheets of MXenergy Holdings Inc. as of June 30, 2008 and 2007, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended June 30, 2008. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of MXenergy Holdings Inc. at June 30, 2008, and 2007, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended June 30, 2008, in conformity with U.S. generallyaccepted accounting principles.

 

As discussed in Note 2 to the consolidated financialstatements, effective July 1, 2006, the Company adopted Statement ofFinancial Accounting Standards No. 123R, *Share-BasedPayments.*

 

 
|   | /s/ Ernst & Young LLP |
|--------|--------------------------------|

 

Stamford, Connecticut

October 9,2008

 

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**MXENERGY HOLDINGS INC.**

**ConsolidatedBalance Sheets**

**(dollars in thousands)**

 
| ** **                                                                                                                         | ** ** | **June 30,** | ** **  |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|
| ** **                                                                                                                         | ** ** | **2008**          | ** **  | **2007** | ** ** |
|                                                                                                                               |       |              |        |   |   |
| **Assets**                                                                                                                         |       |              |        |   |   |
| Current assets:                                                                                                                    |       |              |        |   |   |
| Cash and cash equivalents                                                                                                          | ** ** | **$**             | **71,958**  |   | $ | 136,942 |   |
| Restricted cash                                                                                                                    | ** ** | **587**           |        | 1,050 |   |
| Accounts receivable, net (Notes 6 and 7)                                                                                           | ** ** | **87,673**        |        | 48,321 |   |
| Natural gas inventories                                                                                                            | ** ** | **65,006**        |        | 56,547 |   |
| Current portion of unrealized gains from  risk management activities                                                               | ** ** | **35,864**        |        | 50 |   |
| Income taxes receivable                                                                                                            | ** ** | **7,524**         |        | 351 |   |
| Deferred income taxes                                                                                                              | ** ** | **—**        |        | 9,136 |   |
| Other current assets                                                                                                               | ** ** | **3,361**         |        | 5,311 |   |
| Total current assets                                                                                                               | ** ** | **271,973**       |        | 257,708 |   |
| Unrealized gains from risk management  activities                                                                                  | ** ** | **13,221**        |        | — |   |
| Goodwill                                                                                                                           | ** ** | **3,810**         |        | 3,810 |   |
| Customer acquisition costs, net (Note 10)                                                                                          | ** ** | **41,693**        |        | 38,954 |   |
| Fixed assets, net (Note 11)                                                                                                        | ** ** | **10,525**        |        | 17,849 |   |
| Deferred income taxes                                                                                                              | ** ** | **10,503**        |        | 9,754 |   |
| Other assets                                                                                                                       | ** ** | **4,027**         |        | 7,569 |   |
| Total assets                                                                                                                       | ** ** | **$**             | **355,752** |   | $ | 335,644 |   |
|                                                                                                                               |       |              |        |   |   |
| **Liabilities and stockholders’ equity**                                                                                      |       |              |        |   |   |
| Current liabilities:                                                                                                               |       |              |        |   |   |
| Accounts payable and accrued liabilities                                                                                           | ** ** | **$**             | **36,602**  |   | $ | 31,528 |   |
| Accrued commodity purchases                                                                                                        | ** ** | **51,461**        |        | 31,297 |   |
| Current portion of unrealized losses from  risk management activities                                                              | ** ** | **2,978**         |        | 17,074 |   |
| Deferred revenue                                                                                                                   | ** ** | **7,435**         |        | 11,787 |   |
| Deferred income taxes                                                                                                              | ** ** | **9,800**         |        | — |   |
| Total current liabilities                                                                                                          | ** ** | **108,276**       |        | 91,686 |   |
| Unrealized losses from risk management  activities                                                                                 | ** ** | **2,839**         |        | 3,586 |   |
| Long-term debt:                                                                                                                    |       |              |        |   |   |
| Floating Rate Senior Notes due 2011 (Note  15)                                                                                     | ** ** | **162,648**       |        | 174,364 |   |
| Denham Credit Facility                                                                                                             | ** ** | **—**        |        | 11,040 |   |
| Total long-term debt                                                                                                               | ** ** | **162,648**       |        | 185,404 |   |
| Total liabilities                                                                                                                  | ** ** | **273,763**       |        | 280,676 |   |
|                                                                                                                               | ** ** | ** **        |        |   |   |
| Redeemable Convertible Preferred Stock (Note  16)                                                                                  |       | 48,779            |        | 29,357 |   |
|                                                                                                                               |       |              |        |   |   |
| Commitments and contingencies (Note 20)                                                                                            | ** ** | **—**        |        | — |   |
|                                                                                                                               |       |              |        |   |   |
| Stockholders’ equity:                                                                                                         |       |              |        |   |   |
| Common stock, par value $0.01, 10,000,000  shares authorized; 3,604,788 and 3,404,277 shares issued and outstanding,  respectively | ** ** | **36**            |        | 34 |   |
| Additional paid-in capital                                                                                                         | ** ** | **23,635**        |        | 21,367 |   |
| Unearned stock compensation                                                                                                        | ** ** | **(4**            | **)**       | (22 | ) |
| Accumulated other comprehensive loss                                                                                               | ** ** | **(189**          | **)**       | (129 | ) |
| Retained earnings                                                                                                                  | ** ** | **9,732**         | ** **  | 4,361 |   |
| Total stockholders’ equity                                                                                                    | ** ** | **33,210**        | ** **  | 25,611 |   |
| Total liabilities and stockholders’ equity                                                                                    | ** ** | **$**             | **355,752** |   | $ | 335,644 |   |

 

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

 

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**MXENERGY HOLDINGS INC.**

**ConsolidatedStatements of Operations**

**(dollars in thousands)**

 
| ** **                                                                            | ** ** | **Years ended June 30,** | ** **  |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------|-------------|
| ** **                                                                            | ** ** | **2008**                                | ** **  | **2007** | ** ** | **2006** | ** ** |
|                                                                                  |       |                                    | ** **  |   |   |   |   |
| Sales of natural gas and electricity                                                  | ** ** | **$**                                   | **752,283** | ** ** | $ | 703,926 |   | $ | 362,561 |   |
| Cost of goods sold (excluding depreciation  and amortization):                        |       |                                    | ** **  |   |   |   |   |
| Cost of natural gas and electricity sold                                              | ** ** | **630,006**                             | ** **  | 552,028 |   | 392,612 |   |
| Realized losses (gains) from risk  management activities                              | ** ** | **6,747**                               | ** **  | 33,039 |   | (82,983 | ) |
| Unrealized (gains) losses from risk  management activities                            | ** ** | **(67,168**                             | **)**       | 17,079 |   | 79,897 |   |
| ** **                                                                            |       | **569,585**                             | ** **  | 602,146 |   | 389,526 |   |
| Gross profit (loss)                                                                   | ** ** | **182,698**                             | ** **  | 101,780 |   | (26,965 | ) |
|                                                                                  |       |                                    | ** **  |   |   |   |   |
| Operating expenses:                                                                   |       |                                    | ** **  |   |   |   |   |
| General and administrative expenses                                                   | ** ** | **62,271**                              | ** **  | 54,516 |   | 22,623 |   |
| Advertising and marketing expenses                                                    | ** ** | **4,546**                               | ** **  | 4,044 |   | 2,096 |   |
| Reserves and discounts                                                                | ** ** | **7,130**                               | ** **  | 4,725 |   | 3,395 |   |
| Depreciation and amortization                                                         | ** ** | **32,698**                              | ** **  | 27,730 |   | 8,504 |   |
| Total operating expenses                                                              | ** ** | **106,645**                             | ** **  | 91,015 |   | 36,618 |   |
|                                                                                  |       |                                    | ** **  |   |   |   |   |
| Operating profit (loss)                                                               | ** ** | **76,053**                              | ** **  | 10,765 |   | (63,583 | ) |
| Interest expense (net of interest income of  $3,806, $4,299 and $1,061, respectively) | ** ** | **34,105**                              | ** **  | 33,058 |   | 3,200 |   |
| Income (loss) before income tax (expense)  benefit                                    | ** ** | **41,948**                              | ** **  | (22,293 | ) | (66,783 | ) |
| Income tax (expense) benefit                                                          | ** ** | **(17,155**                             | **)**       | 8,495 |   | 27,001 |   |
| Net income (loss)                                                                     | ** ** | **$**                                   | **24,793**  | ** ** | $ | (13,798 | ) | $ | (39,782 | ) |

 

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

 

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**MXENERGY HOLDINGS INC.**

**ConsolidatedStatements of Stockholders’ Equity**

**(dollars in thousands)**

 
| ** **                                             | ** ** | **Common  Stock  (Par Value)** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Unearned  Stock  Compensation** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Retained  Earnings** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|------------------------|------------|---------------------------------------|------------|
|                                                   |       |                                |       |                             |       |                              |       |                                        |       |                   |       |                                  |       |
| Balance at June 30, 2005                          |       | $                                   | 33         |                             | $          | 18,114                            |       | $                                           | (165       | )                      | $          | (4                                    | )          | $ | 57,941 |   | $ | 75,919 |   |
| Issuance of common stock                               |       | 2                                   |       | 530                              |       | —                            |       | —                                      |       | —                 |       | 532                                   |       |
| Unamortized stock compensation                         |       | —                              |       | 861                              |       | (861                              | )          | —                                      |       | —                 |       | —                                |       |
| Purchase and cancellation of treasury  shares          |       | (1                                  | )          | (2,150                           | )          | —                            |       | —                                      |       | —                 |       | (2,151                                | )          |
| Amortization of stock compensation                     |       | —                              |       | —                           |       | 911                               |       | —                                      |       | —                 |       | 911                                   |       |
| Comprehensive income (loss):                           |       |                                |       |                             |       |                              |       |                                        |       |                   |       |                                  |       |
| Net loss                                               |       | —                              |       | —                           |       | —                            |       | —                                      |       | (39,782                | )          | (39,782                               | )          |
| Foreign currency translation                           |       | —                              |       | —                           |       | —                            |       | (36                                         | )          | —                 |       | (36                                   | )          |
| Comprehensive loss                                     |       |                                |       |                             |       |                              |       |                                        |       |                   |       | (39,818                               | )          |
|                                                   |       |                                |       |                             |       |                              |       |                                        |       |                   |       |                                  |       |
| 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** | ** ** |

 

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

 

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**MXENERGY HOLDINGS INC.**

**ConsolidatedStatements of Cash Flows**

**(dollars in thousands)**

 
| ** **                                                                                          | ** ** | **Years ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                          | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Operating activities:**                                                                           |       |                                    | ** ** |   |   |   |   |
| Net income (loss)                                                                                   | ** ** | **$**                                   | **24,793** | ** ** | $ | (13,798 | ) | $ | (39,782 | ) |
| Adjustments to reconcile net income (loss)  to net cash (used in) provided by operating activities: |       |                                    | ** ** |   |   |   |   |
| Unrealized (gains) losses from risk  management activities                                          | ** ** | **(67,168**                             | **)**      | 17,079 |   | 79,897 |   |
| Stock compensation expense                                                                          | ** ** | **1,704**                               | ** ** | 4,539 |   | 911 |   |
| Depreciation and amortization                                                                       | ** ** | **32,698**                              | ** ** | 27,730 |   | 8,504 |   |
| Deferred income tax expense (benefit)                                                               | ** ** | **18,187**                              | ** ** | (14,449 | ) | (32,764 | ) |
| Unrealized losses on interest rate swaps  and amortization of deferred financing fees               | ** ** | **10,836**                              | ** ** | 7,906 |   | 1,057 |   |
| Amortization of customer contracts acquired                                                         | ** ** | **(762**                                | **)**      | 11,891 |   | (3,276 | ) |
| Changes in assets and liabilities, net of  effects of acquisitions:                                 |       |                                    | ** ** |   |   |   |   |
| Restricted cash                                                                                     | ** ** | **463**                                 | ** ** | (623 | ) | 6,953 |   |
| Accounts receivable                                                                                 | ** ** | **(30,181**                             | **)**      | 3,453 |   | (13,003 | ) |
| Natural gas inventories                                                                             | ** ** | **(7,308**                              | **)**      | (1,712 | ) | (2,685 | ) |
| Income taxes receivable                                                                             | ** ** | **(7,173**                              | **)**      | 5,184 |   | (5,535 | ) |
| Option premiums                                                                                     | ** ** | **1,191**                               | ** ** | 1,835 |   | (1,834 | ) |
| Other assets                                                                                        | ** ** | **609**                                 | ** ** | (993 | ) | 2,645 |   |
| Accounts payable, accrued commodity  purchases and other accrued liabilities                        | ** ** | **17,882**                              | ** ** | 31,555 |   | (5,320 | ) |
| Deferred revenue                                                                                    | ** ** | **(4,352**                              | **)**      | 9,384 |   | 865 |   |
| Net cash (used in) provided by operating  activities                                                | ** ** | **(8,581**                              | **)**      | 88,981 |   | (3,367 | ) |
|                                                                                                |       |                                    | ** ** |   |   |   |   |
| **Investing activities:**                                                                           |       |                                    | ** ** |   |   |   |   |
| 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 | ) | — |   |
| Deposit and capitalized costs related to  purchase of SESCo assets                                  | ** ** | **—**                              | ** ** | 3,348 |   | (3,348 | ) |
| Purchase of Vantage assets                                                                          | ** ** | **—**                              | ** ** | (732 | ) | — |   |
| Purchase of Castle customer portfolio                                                               | ** ** | **—**                              | ** ** | — |   | (3,150 | ) |
| Customer acquisition costs                                                                          | ** ** | **(19,555**                             | **)**      | (7,610 | ) | (6,149 | ) |
| Purchases of fixed assets                                                                           | ** ** | **(1,959**                              | **)**      | (1,882 | ) | (6,178 | ) |
| Net cash used in investing activities                                                               | ** ** | **(33,941**                             | **)**      | (132,920 | ) | (18,825 | ) |
|                                                                                                |       |                                    | ** ** |   |   |   |   |
| **Financing activities:**                                                                           |       |                                    | ** ** |   |   |   |   |
| Proceeds from loans                                                                                 | ** ** | **—**                              | ** ** | 6,000 |   | 210,123 |   |
| Repayments of loans                                                                                 | ** ** | **—**                              | ** ** | (6,000 | ) | (226,502 | ) |
| Debt financing costs                                                                                | ** ** | **—**                              | ** ** | (9,345 | ) | (2,347 | ) |
| Repayments of long-term debt                                                                        | ** ** | **—**                              | ** ** | — |   | (5,000 | ) |
| Proceeds from Denham Credit Facility                                                                | ** ** | **—**                              | ** ** | 23,040 |   | — |   |
| Repayments of Denham Credit Facility                                                                | ** ** | **(11,040**                             | **)**      | (12,000 | ) | — |   |
| Proceeds from bridge loan                                                                           | ** ** | **—**                              | ** ** | 190,000 |   | — |   |
| Repayment of bridge loan                                                                            | ** ** | **—**                              | ** ** | (190,000 | ) | — |   |
| Proceeds from Senior Notes                                                                          | ** ** | **—**                              | ** ** | 185,250 |   | — |   |
| Repurchase of Senior Notes                                                                          | ** ** | **(12,006**                             | **)**      | (11,723 | ) | — |   |
| Issuance of common stock from exercise of  warrants and options                                     | ** ** | **387**                                 | ** ** | 22 |   | 532 |   |
| Issuance of common stock from other  executive compensation                                         | ** ** | **952**                                 | ** ** | — |   | — |   |
| Purchase and cancellation of treasury  shares, net of tax benefit                                   | ** ** | **(755**                                | **)**      | (456 | ) | (2,151 | ) |
| Net cash (used in) provided by financing  activities                                                | ** ** | **(22,462**                             | **)**      | 174,788 |   | (25,345 | ) |
| Net (decrease) increase in cash                                                                     | ** ** | **(64,984**                             | **)**      | 130,849 |   | (47,537 | ) |
| Cash and cash equivalents at beginning of  year                                                     | ** ** | **136,942**                             | ** ** | 6,093 |   | 53,630 |   |
| Cash and cash equivalents at end of year                                                            | ** ** | **$**                                   | **71,958** | ** ** | $ | 136,942 |   | $ | 6,093 |   |
|                                                                                                |       |                                    | ** ** |   |   |   |   |
| **Supplemental cash flow information:**                                                             |       |                                    | ** ** |   |   |   |   |
| Income taxes paid                                                                                   | ** ** | **$**                                   | **5,405**  | ** ** | $ | 753 |   | $ | 12,223 |   |
| Interest paid                                                                                       | ** ** | **$**                                   | **29,426** | ** ** | $ | 17,345 |   | $ | 3,710 |   |

 

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

 

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**MXenergy Holdings Inc.**

**Notes toConsolidated Financial Statements**

 

***Note 1.   Organization***

 

MXenergyHoldings Inc. (“Holdings”), originally founded in 1999 as a retail energymarketer, was incorporated as a Delaware corporation on January 24, 2005as part of a corporate reorganization. The two principal operating subsidiaries of Holdings, MXenergy Inc. andMXenergy Electric Inc., are engaged in the marketing and supply of natural gasand electricity, respectively.  Holdingsand its operating and holding subsidiaries (collectively, the “Company”)operate in 39 market areas located in 14 states in the United States (the “U.S.”)and two Canadian provinces.

 

***Note 2.   SignificantAccounting Policies***

 

**Basis of Presentation**

 

Theaccounting and reporting policies of the Company conform to accountingprinciples generally accepted in the United States of America (“U.S. GAAP”).  Certain reclassifications have been made toprior year amounts to conform to the current year’s presentation.

 

**Principles of Consolidation**

 

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

 

**Use of Estimates and Assumptions**

 

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

 

**Revenue Recognition**

 

*Sales of Natural Gas and Electricity*

 

Revenuesfrom the sale of natural gas and electricity are recognized in the period inwhich the commodity is consumed by customers. Sales of natural gas and electricity are generally billed by the localdistribution companies (“LDCs”), acting as the Company’s agent, on a monthlycycle basis.  The billing cycles forcustomers do not coincide with the accounting periods used for financialreporting purposes.  The Company followsthe accrual method of accounting for revenues whereby revenues applicable togas and electricity consumed by customers, but not yet billed under the cyclebilling method, are estimated and accrued along with the related costs, andincluded in operations.  Such estimatesare adjusted to actual billed amounts in subsequent periods upon obtainingfinal information from the LDC.  Changesin these estimates are reflected in operations in the period in which they arerefined.

 

*Pass-through Revenues*

 

Revenuesalso include certain “pass-through” revenues, which primarily representtransportation and distribution charges billed to customers by certainLDCs.  These revenues are offset bycorresponding amounts in cost of goods sold for amounts billed to the Companyby the LDC.  Pass-through revenueapproximated $63.6 million and $54.5 million for the fiscal years ended June 30,2008 and 2007.  Pass-through revenue wasnot material for the fiscal year ended June 30, 2006.

 

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*Deferred Revenue*

 

Customerswho are on budget-billed plans pay for their natural gas or electricity atratable monthly amounts, based on estimated annual usage, while the Companyrecords revenue when the natural gas or electricity is consumed by thecustomer.  The cumulative differencebetween actual usage for these customers and the budget-billed amount actuallyinvoiced, net of cash payments made by the customers, is equal to the netbudget-billed variance.  If the netbudget-billed variance is a receivable from the customer at the balance sheetdate, indicating that the customer’s actual usage has exceeded amounts billedto the customer, the amount is reported as accounts receivable in theconsolidated balance sheets.  If the netbudget-billed variance is a liability to the customer, indicating that amountsbilled have exceeded actual usage, the amount is reported as deferred revenuein the consolidated balance sheets. Budget billed customer accounts are adjusted annually for differencesbetween estimated and actual consumption.

 

*Sales Incentives*

 

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

 

*Fees Charged to Customers*

 

Variousfees charged to customers, such as late payment fees, early contracttermination fees, service shut-off fees and fees charged to customers forproviding copies of bills, are generally recorded as revenue when earned andwhen collection is deemed to be reasonably assured.  Fee revenue approximated $19.4 million and$17.1 million for the fiscal years ended June 30, 2008 and 2007.  Fee revenue was not material for the fiscalyear ended June 30, 2006.

 

*Collections of Sales Tax*

 

Salestax is added to customer bills for many of the markets served by theCompany.  Sales tax collected fromcustomers on behalf of governmental entities is recorded in accounts payableand accrued liabilities on the consolidated balance sheets.

 

**Fair Value of Financial Instruments**

 

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

 

*Short-term Financial Assets and Liabilities*

 

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

 

TheCompany had approximately $68.5 million and $136.5 million invested in moneymarket funds, each share of which was valued at $1.00 at June 30, 2008 and2007, respectively.

 

*Derivatives*

 

Derivativesare recorded at fair value.   Since theCompany has not elected to designate any derivatives as hedges, any changes infair value are adjusted through unrealized losses (gains) from risk managementactivities in the consolidated statements of operations, with relatedoutstanding settlement amounts recorded in unrealized gains asset accounts andunrealized losses liability accounts in the consolidated balance sheets.

 

Marketprices used to value derivative positions reflect management’s best estimateconsidering various factors including closing exchange and over-the-counterquotations, parity differentials, time value, and volatility factors underlyingthe

 

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commitments.

 

*Long-term Debt*

 

AtJune 30, 2008, long-term debt consisted of The Floating Rate Senior Notes due2011 (the “Senior Notes”), which had a carrying value, net of unearneddiscount, of $162.6 million.  Utilizing aweighted average value for the bonds traded on June 30, 2008, the fair marketvalue of the Senior Notes was approximately $140.0 million as of June 30, 2008.

 

**Foreign Currency Translation**

 

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

 

**Cash and Cash Equivalents**

 

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

 

**Restricted Cash**

 

Restrictedcash consists of: (1) money market funds held in escrow as contingentconsideration related to the acquisition of Vantage Power Services, L.P.; (2) cashdeposits received from customers acquired from PS Energy Group, Inc.(refer to Note 4 of these consolidated financial statements) that are held inescrow; and (3) cash and money market funds required as security forletters of credit and surety bonds required by LDCs, utility commissions,pipeline tariffs and regulations.

 

**Accounts Receivable and Allowance for DoubtfulAccounts**

 

TheCompany delivers natural gas and electricity to its customers through LDCs,many of which guarantee amounts due from customers for consumed 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 has not experiencedmaterial credit losses from any of the respective LDC’s.

 

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

 

Accountsreceivable, net also includes imbalance settlements due from LDCs, whichrepresent differences between the natural gas delivered to LDCs for consumptionby our customers and actual usage by our customers.  Such imbalances are expected to be settled incash in accordance with contractual payment arrangements.

 

**Natural Gas Inventories**

 

Naturalgas inventories primarily represent natural gas held by third parties on theCompany’s behalf.  Also included areestimated commodity delivery/usage imbalance settlement amounts that representnatural gas to be transferred to the Company from various third parties withinthe upcoming twelve-month period. Natural gas inventories are valued at the lower of cost or market valueon a weighted-average cost basis.  Theweighted-average cost of inventory includes related transportation costs.

 

**Business Combinations and Goodwill**

 

Sinceits organization in 1999, the Company has acquired natural gas and electricityoperations of numerous energy companies, each of which was recorded as apurchase business combination.  For apurchase business combination, the purchase price is allocated to the netassets acquired based on their fair values at the acquisition date.  Certain intangible

 

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assets,such as goodwill and customer acquisition costs, may be recorded in the Company’sconsolidated financial statements as a result of these acquisitions if thepurchase price exceeds the values assigned to identifiable tangibleassets.  The initial purchase priceallocation may be reviewed and adjusted for a period of twelve monthssubsequent to the acquisition date as new or revised information becomesavailable.

 

Asof June 30, 2008, the Company had goodwill of $3.8 million, whichrepresented the excess of purchase price over the fair value of identifiablenet assets acquired from Shell Energy Services Company L.L.C. (“SESCo”) in August 2006.   Goodwill is not amortized, but rather isreviewed for impairment at least annually or more frequently if events orchanges in circumstances indicate that the carrying amount may not berecoverable.  Goodwill is tested forimpairment annually at June 30.  TheCompany utilizes an undiscounted cash flow methodology for its impairmenttesting, which gives consideration to significant and long-term changes inindustry and economic conditions as primary indicators of potential impairment.

 

**Customer Acquisition Costs, Net**

 

Customeracquisition costs are comprised of: (1) customer contracts acquiredthrough bulk acquisitions and business combinations; and (2) direct salesand advertising 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.

 

Forcustomer contracts acquired through bulk acquisitions and businesscombinations, acquisition costs are recorded at their fair value on theacquisition date and amortized on a straight-line basis over the estimated lifeof the customers acquired.  Non-hourlytelemarketing and door-to-door costs represent incremental direct costs relatedto arrangements with third-party contractors. The Company currently 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.  The Companycurrently estimates 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.

 

Amortizationof customer acquisition costs is recorded in depreciation and amortization onthe consolidated 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.

 

Customeracquisition costs are reviewed for recoverability on a quarterly basis, orwhenever events or changes in circumstances indicate that their carrying amountmay not be recoverable.  In the eventthat recoverability 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 shallrecognize 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.

 

**Fixed Assets, Net**

 

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

 

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**Capitalized Software Costs**

 

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

 

Thefollowing software-related costs are generally expensed as incurred:

 

·                  research costs, such as costs related to thedetermination 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 assist inthe development or installation of new software;

·                  internal or external training costs relatedto 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 consulting andoverall control reviews that are not directly associated with the developmentof software.

 

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

 

Capitalizedsoftware costs 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 to providefuture service potential;

·                  it is no longer probable that software underdevelopment will be completed and placed in service; and

·                  costs of developing or modifying internal-usesoftware significantly exceed expected development costs or costs of comparablethird-party software.

 

**Income Taxes**

 

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

 

Deferredtax assets and liabilities are recognized for the estimated future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases using enacted tax rates expected to be in effect for the year in whichthe temporary differences are expected to reverse.

 

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**Derivatives and Hedging Activities**

 

*Commodity Derivatives*

 

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

 

TheCompany also utilizes certain physical forward commodity purchase and salecontracts to reduce exposure to fluctuations in the price of natural gas andelectricity, which are deemed to be “normal purchases and normal sales” underU.S. GAAP guidelines.  Accordingly, suchcontracts are 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.  Refer to Note 20 ofthese consolidated financial statements for additional information regardingthe Company’s physical forward contracts.

 

Marketprices used to value derivative positions reflect management’s best estimateconsidering various factors including closing exchange and over-the-counterquotations, parity differentials, time value, and volatility factors underlyingthe commitments.

 

*Interest Rate Swaps*

 

TheCompany utilizes interest rate swaps to reduce its exposure to interest ratefluctuations related to its Senior Notes. 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.

 

**Debt**

 

Debtinstruments are recorded at their face amounts on the consolidated balancesheet, less any discount or plus any premium. Debt intended to be repaid within one year is classified as a currentliability.

 

*Debt Issue Discounts and Debt Issue Costs*

 

Debtissue discounts are recorded as decreases to recorded debt balances and areamortized to interest expense over the remaining life of the related debtinstrument.  Certain costs that aredirectly related to the issuance of debt, such as underwriting fees, legal feesand other professional services, are deferred and recorded in other assets onthe Company’s consolidated balance sheets and amortized to interest expenseover 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 relatedpremium (discount) and debt issue costs are recorded as an adjustment tointerest expense.

 

*Early Extinguishment of Debt*

 

Sincethe Senior Notes were issued in August 2006, the Company has purchasedapproximately $24.8 million in aggregate principal amount of Senior Notes fromnoteholders.  These transactions wererecorded as early extinguishments of debt. Gains from these transactions, which result from the discounts paid bythe Company for outstanding Senior Notes, are recorded as adjustments tointerest expense.

 

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*Interest Expense*

 

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

 

**Redeemable Convertible Preferred Stock**

 

Redeemableconvertible preferred stock (the “Preferred Stock”) is recorded outside ofstockholders’ equity on the consolidated balance sheets since it is deemed tobe redeemable at the option of the holders of the Preferred Stock.  Since the Company has determined that it isprobable that the Preferred Stock will become redeemable at June 30, 2009, thePreferred Stock is recorded at its estimated redemption value as of June 30,2008.

 

Theagreement that governs the Preferred Stock contains various provisions forredemption of the Preferred Stock, for conversion of the Preferred Stock tocommon stock and for preferences of the holders of the Preferred Stock shouldthe Company be liquidated.  Should any ofthese events occur, the holders of the Preferred Stock are guaranteed a minimumreturn of 12% per annum, compounded annually, from the June 30, 2004 issuedate through the date of the redemption, conversion or liquidation event.  Any adjustment to the carrying value of thePreferred Stock as a result of any of these events would be recorded as acharge against retained earnings or, in the absence of retained earnings, bycharges against additional paid-in capital.

 

**Stock Based Compensation**

 

TheCompany currently has three stock-based compensation plans in effect, underwhich stock 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 17 to these consolidatedfinancial statements for additional information regarding the Company’s stockbased compensation plans and its grants of options and warrants.

 

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

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standard No. 123 (revised 2004), “Share-BasedPayment” (“SFAS No. 123R”), which requires the recognition of the cost ofemployee services received in exchange for an award of equity instruments inthe financial statements.  Themeasurement of such cost to be recognized must be based on the fair value ofthe award on the grant date. It also requires the cost to be recognized overthe period during which an employee is required to provide services in exchangefor the award (the “vesting period”). SFAS No. 123R replaced SFAS No. 123, “Accounting for StockBased Compensation” (“SFAS No. 123”) and superseded Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”)and related interpretations. The Company adopted SFAS No. 123R on July 1,2006. As the Company historically utilized the minimum value method for proforma disclosures under the original provisions of SFAS No. 123, it wasrequired to adopt the provisions of SFAS No. 123R using the prospectivemethod.  Under the prospective method,the Company continues to account for non-vested awards outstanding at the dateof adoption of SFAS No. 123R in the same manner as they had been accountedfor prior to adoption for financial statement recognition purposes.  All awards granted, modified or settled afterthe adoption will be accounted for using the measurement, recognition andattribution provisions of SFAS No. 123R. The adoption of SFAS No. 123R did not have any financial impact onthe Company’s financial position, results of operations or cash flows for anyawards granted prior to June 30, 2006.

 

Forstock option awards granted after June 30, 2006, the Company follows theprovisions of SFAS No. 123R and recognizes compensation expenseprospectively over the vesting period. Total compensation expense to be recognized over the vesting period isbased on: (1) the fair value of the Company’s common stock at thequarterly reporting date (e.g., September 30, December 31, March 31and June 30) immediately prior to the grant date, as determined by anindependent valuation of the Company’s common stock or internally developedvaluation models; and (2) the total number of options expected to beexercised, net of expected forfeitures. The cumulative effect on current and prior periods of a change in thenumber of options expected to be exercised, net of forfeitures, is recognizedin compensation expense in the period of the change.

 

TheCompany has elected to follow APB No. 25, and related interpretations, inaccounting for stock option awards granted to employees prior to June 30,2006, rather than the alternative fair value method allowed under SFAS No. 123.  APB

 

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No. 25provides that compensation expense relative to the Company’s employee stock andstock option grants be measured based on the intrinsic value of the stock orstock option at the grant date.  Pursuantto APB No. 25, for options granted to employees prior to June 30,2006, the Company was not required to recognize compensation expense during thefiscal years ended June 30, 2008, 2007 or 2006 because the exercise pricefor all such awards equaled or exceeded the estimated fair value of the Company’scommon stock at the grant date.

 

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

 

Priorto June 30, 2006, the Company issued warrants to certain employees andnon-employees that permit the warrant holder the option to: (1) exercisesuch warrant for cash; or (2) exercise by withholding that number ofcommon shares having a total fair value equal to the warrant exercise amountfrom the total number of common shares that would otherwise have been issuedupon exercise of the warrant (a “cashless exercise”).  Compensation cost is accrued as a charge toexpense over the vesting period of such warrants using the accelerated expenseattribution method under FASB Interpretation No. 28 “Accounting for StockAppreciation Rights and Other Variable Stock Option or Award Plans.”  For these awards, it is presumed that theemployee will elect the cashless exercise and compensation expense is adjustedperiodically to reflect the amount by which the estimated current fair value ofthe Company’s common shares exceeds the exercise price of the warrant (known as“variable plan accounting”).  Increasesor decreases in the estimated fair value of the Company’s common stock betweenthe grant date and the exercise date result in corresponding increases ordecreases, respectively, in compensation expense in the period in which thechange in estimated fair value of common stock occurs.  Accrued compensation for an award that issubsequently forfeited or cancelled is adjusted by decreasing compensationexpense in the period of forfeiture or cancellation.

 

Priorto June 30, 2006, warrants were issued to a stockholder of the Companywhich are not subject to variable plan accounting because there is norequirement to provide any future service to the Company in order to exercisethe warrants.  Therefore, the Companydoes not record any compensation expense related to these warrants.

 

Compensationexpense for option awards subject to graded vesting is recognized based on theaccelerated attribution method as specified under U.S. GAAP guidelines.  Compensation expense related to stockcompensation plans is recorded in general and administrative expenses in theconsolidated statements of operations.

 

**Transactions with Related Parties**

 

Inthe normal course of business, the Company enters into transactions withvarious non-employee related parties for financing arrangements, legalservices, financial advisory services and management services.  Refer to Note 18 to these consolidatedfinancial statements for additional information regarding related partytransactions.

 

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***Note 3.   NewAccounting Pronouncements***

 

***Accounting Pronouncements Adopted Duringthe Fiscal Year Ended June 30, 2008***

 

InJune 2006, the Financial Accounting Standards Board (the “FASB”) issuedFASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109” (“FIN No. 48”).  FIN No. 48 establishes threshold andmeasurement attributes for financial statement recognition and measurement oftax positions taken or expected to be taken in a tax return.  FIN No. 48 also provides guidance onde-recognition of a previously recognized tax position, classification,interest and penalties, accounting in interim periods, disclosure andtransition.  The Company adopted theprovisions of FIN No. 48 effective July 1, 2007.  The adoption of FIN No. 48 did not havea material impact on the Company’s financial position or results of operations(refer to Note 12 of these consolidated financial statements).

 

***Accounting Pronouncements Not YetAdopted as of June 30, 2008***

 

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards 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 intends to adopt the provisionsof SFAS No. 157 effective July 1, 2008.  The Company is currently evaluating theimpact that SFAS No. 157 will have on its financial position, results ofoperations and financial statement disclosures.

 

InFebruary 2007, the FASB issued Statement of Financial Accounting StandardsNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS No. 159”), which creates an alternate measurementmethod for certain financial assets and liabilities.  SFAS No. 159 permits entities to electfair value measurement for both the initial and subsequent measurements ofcertain financial assets and liabilities, generally on an instrument byinstrument basis.  Changes in fair valuesubsequent to initial measurement are to be recognized in earnings during theperiods when those changes occur.  SFAS No. 159also requires additional disclosures to compensate for the lack ofcomparability that will arise from the election of the fair value option forthose financial instruments.  The Companyintends to adopt the provisions of SFAS No. 159 effective July 1,2008.  The Company is currentlyevaluating the provisions of SFAS No. 159 to determine whether it willadopt the fair value option for any financial instruments.

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 141(R), “Business Combinations” (“SFAS No. 141(R)”).  SFAS No. 141(R) establishesprinciples and requirements for an acquiring company to recognize and measurein its financial statements the identifiable assets acquired, liabilitiesassumed, goodwill acquired, any gain from a bargain purchase, and anynoncontrolling interest in an acquired company. In addition, SFAS No. 141(R) provides guidance for disclosuresrelating 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.  Early adoption is not permitted.

 

Inaddition, also in December 2007, the FASB issued Statement of FinancialAccounting Standards No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements – An Amendment of ARB No. 51” (“SFAS No. 160”).  SFAS No. 160 establishes accounting andreporting standards for ownership interests in subsidiaries held by partiesother than the parent, for changes in a parent’s ownership interest while theparent retains its controlling financial interest in a subsidiary, and for anyretained noncontrolling equity investment by a parent when a subsidiary isdeconsolidated.  SFAS No. 160 iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. Early adoption is not permitted.

 

TheCompany is currently evaluating the provisions of SFAS No. 141(R) andSFAS No. 160 to determine their likely impact on the accounting andreporting for acquisitions, if any.  TheCompany expects to adopt the provisions of SFAS No. 141(R) and SFAS No. 160for acquisitions occurring on or after July 1, 2009.

 

InMarch 2008, the FASB issued Statement of Financial Accounting Standards No. 161,“Disclosures about 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 uses derivativeinstruments; 2) how derivative instruments and related hedged items areaccounted for under U.S. GAAP; and 3) how derivative instruments and relatedhedged items affect a company’s financial position, financial performance andcash flows.  SFAS No. 161 must beapplied prospectively for fiscal years and interim periods beginning after November 15,

 

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2008.  The Company intends to apply the provisionsof SFAS No. 161 beginning January 1, 2009.  The Company is currently evaluating theimpact that adoption of SFAS No. 161 will have, if any, on its financialstatement disclosures.

 

InMay 2008, the FASB issued Statement of Financial Accounting Standards No. 162,“The Hierarchy 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.  Any effect of applying theprovisions of SFAS No. 162 shall be reported as a change of accountingprinciple in accordance with FASB Statement of Financial Accounting Standards No. 154,“Accounting Changes and Error Corrections.” SFAS No. 162 will become effective 60 days following the Securitiesand Exchange Commission’s approval of related amendments to Public CompanyAccounting Oversight Board guidelines. The adoption of SFAS No. 162 is not expected to have any impact onThe Company’s financial position or results of operations.

 

***Note 4.   Acquisitions***

 

**GasKey Division of PS Energy Group, Inc.**

 

OnJanuary 22, 2008, the Company completed the acquisition of substantiallyall of the retail natural gas assets of PS Energy Group, Inc., primarilyincluding the natural gas customer contracts of their GasKey division (the “GasKeyAcquisition”).  Nearly all of thecustomers served under such contracts are located in Georgia.  Most of the natural gas volumes are consumedby commercial customers.  The Companyacquired approximately 60,000 residential customer equivalents (“RCEs,” eachrepresenting a natural gas customer with a standard consumption of 100 MMBtusper year or an electricity customer with a standard consumption of 10 MWhrs peryear).  Consistent with the Company’sexperience with previous acquisitions, attrition for this portfolio is expectedto be higher than that for customers acquired through organic growth.

 

Pursuantto the terms of the related Asset Purchase Agreement, the Company purchased theGasKey net assets for a base amount of approximately $4.3 million, plus workingcapital, plus contingent consideration payable for volumes consumed on customercontracts acquired for a 36-month period subsequent to the acquisition date(refer to Note 20).  The final purchaseprice is subject to certain adjustments in accordance with the terms andconditions of such Asset Purchase Agreement. The Company also assumed certain liabilities related to the GasKeyassets.

 

Regulatoryapproval for the GasKey Acquisition was received in January 2008.  The Company recorded the transaction as apurchase business combination as of January 1, 2008.  The initial purchase price of $12.0 millionwas paid from the Company’s available cash balance.  The assets acquired and related operationsrepresent less than 10% of the Company’s consolidated assets andoperations.  The operations acquired areincluded in the Company’s natural gas business segment.

 

Pursuantto the Asset Purchase Agreement, the Company assumed the economic benefit andrisk associated with the GasKey net assets effective November 1,2007.  During the period from November 1,2007 to December 31, 2007, the Company extended $13.6 million of credit toPS Energy Group, Inc., of which $9.0 million was loaned directly to PSEnergy Group, Inc. and $4.6 million represented collateral and guaranteesfunded by the Company to fulfill LDC requirements related to the GasKeybusiness.  Also during this period, theCompany recorded cash receipts from accounts receivable, cash payments fornatural gas inventory purchases, certain operating expenditures, and otheroperating cash activity related to the assets acquired and liabilities assumedin the GasKey Acquisition.   The $9.0million loan to PS Energy Group, Inc. was repaid on the closing date.

 

Thetotal purchase price was adjusted to reflect the operating activity recordedduring the period from November 1, 2007 through December 31, 2007(the “adjusted purchase price”).  TheCompany allocated the adjusted purchase price to the net assets acquired attheir fair values on January 1, 2008. The initial allocation of the adjusted purchase price, as summarized inthe following table, is considered to be preliminary, and still subject tofinal evaluation of the value assigned to the customer acquisition costs.  The adjusted allocation includes adjustmentsto customer acquisition costs resulting from incentive payments to PS EnergyGroup, Inc. in accordance with the agreement governing the GasKeyAcquisition.

 

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Theinitial and adjusted purchase price allocations for the GasKey Acquisition aresummarized in the following table.

 
| ** **                               | ** ** | **Initial Allocation   As of   January 1, 2008** | ** ** | **Adjusted Allocation   As of   June 30, 2008** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **(in thousands)**                                                        | ** ** |
|                                     |       |                                                                           |       |                                                                          |       |
| Accounts receivable                      |       | $                                                                              | 9,171      |                                                                          | $          | 9,171 |   |
| Natural gas inventories                  |       | 1,151                                                                          |       | 1,151                                                                         |       |
| Customer acquisition costs (1)           |       | 6,221                                                                          |       | 6,599                                                                         |       |
| Customer contract assets (2)             |       | 750                                                                            |       | 750                                                                           |       |
| Other assets                             |       | 1,830                                                                          |       | 1,830                                                                         |       |
| Customer contract liabilities (3)        |       | (1,250                                                                         | )          | (1,250                                                                        | )          |
| Accounts payable and accrued liabilities |       | (5,824                                                                         | )          | (5,824                                                                        | )          |
| Total                                    |       | $                                                                              | 12,049     |                                                                          | $          | 12,427 |   |

 

----

(1)          Customer acquisition costs are being amortizedon a straight-line basis over an estimated average customer life of threeyears.

(2)          Represents customer and supply contractsacquired that had contract terms above market rates at the date ofacquisition.  Such amounts are amortizedthrough cost of natural gas sold as the Company makes delivery under thecontracts.

(3)          Represents customer and supply contractsacquired that had contract terms below market rates at the date ofacquisition.  Such amounts are recordedin accounts payable and accrued liabilities and amortized through cost ofnatural gas sold as the Company makes delivery under the contracts.

 

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**Shell Energy Services Company L.L.C.**

 

InAugust 2006, the Company completed its acquisition of substantially all ofthe assets of SESCo, a retail energy marketer that serves residential and smallto mid-market commercial customers in Georgia and Ohio (the “SESCo Acquisition”).  The SESCo Acquisition added approximately315,000 RCEs to the Company’s customer portfolio, and added the state ofGeorgia to the list of U.S. states in which the Company operates.  The total purchase price for the SESCoAcquisition was approximately $126.0 million. The SESCo Acquisition was accounted for as a purchase businesscombination and the results of operations of SESCo are included in the Company’soperating results beginning on August 1, 2006.

 

DuringAugust 2006, the Company utilized a bridge loan from two investment banksto finance the SESCo Acquisition.  Thebridge loan was repaid with proceeds from the sale of $190.0 million aggregateprincipal amount of the Senior Notes (refer to Note 16 of these consolidatedfinancial statements).  Fees and interestof $0.8 million associated with the bridge loan were charged to interestexpense during the fiscal year ended June 30, 2007.

 

AtAugust 1, 2006, the preliminary purchase price was initially allocatedbased upon the estimated fair value of the net assets acquired at the date ofacquisition.  The final allocations werebased on independent valuations that were completed during the fourth quarterof fiscal year 2007.  As a result of changesto the purchase price allocation during the fourth quarter of fiscal 2007, theCompany recorded a benefit of $0.8 million as a reduction of amortizationexpense related to customer acquisition costs.

 

Theinitial and final purchase price allocations for the SESCo Acquisition aresummarized in the following table.

 
| ** **                        | ** ** | **Initial**             | ** ** | **Final**      | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------------|------------|
| ** **                        | ** ** | **Allocation**          | ** ** | **Allocation** | ** ** |
| ** **                        | ** ** | **(in thousands)** | ** ** |
|                              |       |                    |       |           |       |
| Accounts receivable               |       | $                       | 16,392     |           | $          | 17,304 |   |
| Inventory                         |       | 33,501                  |       | 36,336         |       |
| Prepaid peaking service           |       | —                  |       | 2,652          |       |
| Fixed assets                      |       | 15,000                  |       | 15,510         |       |
| Customer acquisition costs (1)    |       | 56,381                  |       | 38,500         |       |
| Customer contract assets (2)      |       | 6,306                   |       | 15,345         |       |
| Goodwill                          |       | —                  |       | 3,810          |       |
| Customer contract liabilities (3) |       | (2,050                  | )          | (3,413         | )          |
| Total                             |       | $                       | 125,530    |           | $          | 126,044 |   |

 

----

(1)          Customer acquisition costs are being amortizedon a straight-line basis over an estimated average customer life of threeyears.

(2)          Represents customer and supply contractsacquired that had contract terms above market rates at the date ofacquisition.  Such amounts are amortizedthrough cost of natural gas sold as the Company makes delivery under thecontracts.

(3)          Represents customer and supply contractsacquired that had contract terms below market rates at the date ofacquisition.  Such amounts are recordedin accounts payable and accrued liabilities and amortized through cost ofnatural gas sold as the Company makes delivery under the contracts.

 

Thegoodwill, which is reflected in the Company’s natural gas segment, representsthe Company’s cost of entering a new market, as well as workforce-relatedmatters.  The Company will be deductingthe entire amount of goodwill for tax purposes over 15 years.

 

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Thefollowing unaudited pro forma financial information for the fiscal year ended June 30,2006 assumes the SESCo Acquisition occurred on July 1, 2005.  The pro forma information is not necessarilyindicative of the results that would have been achieved had the SESCoAcquisition occurred on such date nor is it necessarily indicative of futureresults.

 
| ** **           | ** ** | **Fiscal Year   Ended   June 30, 2006** | ** ** |
|----------------------|------------|------------------------------------------------------------------|------------|
| ** **           | ** ** | **(in thousands)**                                          | ** ** |
|                 |       |                                                             |       |
| Sales of natural gas |       | $                                                                | 1,010,274  |   |
| Net loss             |       | (54,430                                                          | )          |
|                      |            |                                                                  |            |  |

 

InAugust 2006, in connection with the SESCo Acquisition, the Companyapproved and announced its rationalization plan to move certain of itsoperations to Houston, Texas.  The termsof the rationalization plan, which were specific to each employee affected,included various employee benefit cost components such as severance, retentionbonuses and reimbursement of relocation costs. Certain employee benefit costs were contingent on future events, such ascontinued employment during defined transition periods.  The Company recorded rationalization chargesof $1.2 million during the fiscal year ended June 30, 2007.   All rationalization charges were recorded togeneral and administrative expenses in the consolidated statements ofoperations.

 

**Vantage Power Services, L.P.**

 

OnMay 17, 2007, the Company acquired substantially all of the assets of VantagePower Services, L.P. (“Vantage”) and began supplying power to approximately12,000 former electricity RCEs of Vantage in and around Houston, Dallas/Ft.Worth and Corpus Christi, Texas (the “Vantage Acquisition”).  The Vantage Acquisition was accounted for asa purchase business combination and the results of operations of Vantage areincluded in the Company’s operating results beginning on May 17,2007.  The initial purchase price of $0.7million was allocated based upon the estimated fair value of the net assetsacquired at the date of acquisition.  Thefinal allocation includes adjustments to customer acquisition costs resultingfrom incentive payments to Vantage in accordance with the agreement governingthe Vantage Acquisition.

 

Theinitial and final purchase price allocations for the Vantage Acquisition aresummarized in the following table.

 
| ** **                        | ** ** | **Initial   Allocation** | ** ** | **Final   Allocation** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(in thousands)**       | ** ** |
|                              |       |                          |       |                        |       |
| Other current assets              |       | $                             | 2          |                        | $          | 2 |   |
| Fixed assets                      |       | 10                            |       | 10                          |       |
| Customer acquisition costs (1)    |       | 1,599                         |       | 2,380                       |       |
| Customer contract liabilities (2) |       | (879                          | )          | (879                        | )          |
| Total                             |       | $                             | 732        |                        | $          | 1,513 |   |

 

----

(1)          Customer acquisition costs are being amortizedon a straight-line basis over an estimated average customer life of threeyears.

(2)          Represents customer and supply contractsacquired that had contract terms below market rates at the date ofacquisition.  Such amounts are recordedin accounts payable and accrued liabilities and amortized through costelectricity sold as the Company makes delivery under the contracts.

 

Theagreement governing the Vantage Acquisition includes provisions for contingentconsideration payable to Vantage for volumes consumed on customer accountsacquired for an 18-month period subsequent to the acquisition date (refer toNote 20).

 

**SubsequentEvent**

 

In October 2008, the Company receivedregulatory and bankruptcy court approval and entered into an agreement topurchase liquefied natural gas inventory from an insolvent Georgia-based retailgas company.  In connection therewith, the related portfolio of naturalgas customers was transferred to the Company at no cost.  The totalpurchase price for the inventory was approximately $1.5 million.  Thepurchase agreement also includes transition fees of approximately $0.5 million,which will be expensed as incurred by the Company.  This acquisition isnot expected to have a material impact on the Company’s financial position orresults of operations for the fiscal year ended June 30, 2009.

 

***Note 5.   Seasonalityof Operations***

 

Weatherconditions have a significant impact on customer demand and on the price ofnatural gas and electricity.  Customerdemand exposes the Company to a high degree of seasonality in sales, cost ofsales, billing to and cash collections from customers, inventory requirementsand cash flows.  In addition, customerswho choose to be on budget billing programs and certain LDCs who pay upondelivery of natural gas can cause timing differences between the billing andcollection of accounts receivable and the recording of revenues.  The Company utilizes a considerable amount ofcash from operations to fund natural gas inventory purchases, accountsreceivable and other working capital requirements during the months of May throughNovember of each fiscal year.  Themajority of natural gas consumption occurs during the months of November throughMarch with collections on accounts receivable peaking in the spring.  In contrast, electricity consumption peaksduring the summer months of June through September.

 

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

 

Accountsreceivable, net is summarized in the following table.

** **
| ** **                                  | ** ** | **Balances at June 30.** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                | ** ** | **2007** | ** ** |
| ** **                                  | ** ** | **(in thousands)**                 | ** ** |
| Billed customer accounts receivable:        |       |                                    | ** ** |   |   |
| Guaranteed by LDCs                          | ** ** | **$**                                   | **17,085** | ** ** | $ | 8,721 | ** ** |
| Non-guaranteed by LDCs                      | ** ** | **32,966**                              | ** ** | 27,314 |   |
| ** **                                  |       | **50,051**                              | ** ** | 36,035 |   |
| Unbilled customer accounts receivable:      |       |                                    | ** ** |   |   |
| Guaranteed by LDCs                          | ** ** | **9,803**                               | ** ** | 3,487 |   |
| Non-guaranteed by LDCs                      | ** ** | **19,905**                              | ** ** | 10,268 |   |
| ** **                                  |       | **29,708**                              | ** ** | 13,755 |   |
| Total customer accounts receivable          | ** ** | **79,759**                              | ** ** | 49,790 |   |
| Less: Allowance for doubtful accounts       | ** ** | **(5,154**                              | **)**      | (5,259 | ) |
| Customer accounts receivable, net           | ** ** | **74,605**                              | ** ** | 44,531 |   |
| Imbalance settlements and other receivables | ** ** | **13,068**                              | ** ** | 3,790 |   |
| Accounts receivable, net                    | ** ** | **$**                                   | **87,673** | ** ** | $ | 48,321 |   |

 

Billedcustomer accounts receivable represents uncollected revenues that have beenbilled directly to customers by the Company or on the Company’s behalf bycertain LDCs.  Unbilled customer accountsreceivable represent estimated revenues associated with natural gas andelectricity consumed but not yet billed to customers under the LDC’s monthlycycle billing method.

 

TheCompany’s credit risk is limited as certain LDCs guarantee billed and unbilledcustomer accounts receivable.  As of June 30,2008 and 2007, 100% of the Company’s billed and unbilled customer accountsreceivable in these guaranteed markets was with LDCs that have an investmentgrade credit rating.

 

Inthe market areas where the LDC does not guarantee customer accounts receivable,the Company maintains an allowance for doubtful accounts that is based upon thecredit risk of its customers, historical trends and other information.  Refer to Note 7 of these consolidatedfinancial statements for additional analysis of the Company’s allowance fordoubtful accounts.

 

Imbalance settlements represent differences between the natural gasdelivered to LDCs for consumption by our customers and actual usage by ourcustomers.  Such imbalances are expectedto be settled in cash from the LDCs in accordance with contractual paymentarrangements.

 

TheCompany operates in 39 market areas located in 14 U.S. states and two CanadianProvinces.  The Company’s diversified geographiccoverage mitigates its credit exposure which could result from concentrationsin a single LDC territory or a single regulatory jurisdiction, from extremelocal weather patterns or from an economic downturn in any single geographicregion.

 

Inaddition, the Company has limited exposure to risk associated with highconcentrations of sales volumes with individual customers.  For the fiscal years ended June 30, 2008and 2007, the Company’s largest customer accounted for approximately 2% oftotal sales volume.

 

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***Note 7.   Allowancefor Doubtful Accounts***

 

Ananalysis of the allowance for doubtful accounts is provided in the followingtable.

** **
| ** **                                             | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                            | ** ** |
|                                                   |       |                                               |       |   |   |   |   |
| Balance at beginning of period                         |       | $                                                  | 5,259      |   | $ | 3,285 |   | $ | 1,899 |   |
| Add: Provision for doubtful accounts                   |       | 5,050                                              |       | 3,018 |   | 1,552 |   |
| Less: Net charge offs of customer accounts  receivable |       | (5,155                                             | )          | (1,044 | ) | (166 | ) |
| Balance at end of period                               |       | $                                                  | 5,154      |   | $ | 5,259 |   | $ | 3,285 |   |

 

Theprovision for doubtful accounts and net charge offs of customer accountsreceivable both represented less than 1% of total revenues for each of thefiscal years ended June 30, 2008, 2007 and 2006.

 

Reservesand discounts in the consolidated statements of operations includes theprovision for doubtful accounts as disclosed in the table above as well asdiscounts related to customer accounts receivable that are guaranteed byLDCs.  Discounts charged by LDCs averageapproximately 1% of collections, which is effectively the cost to guarantee thereceivables.  The components of reservesand discounts are summarized in the following table.

 
| ** **                       | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **(in thousands)**                            | ** ** |
|                             |       |                                               |       |   |   |   |   |
| Provision for doubtful accounts  |       | $                                                  | 5,050      |   | $ | 3,018 |   | $ | 1,552 |   |
| Discounts for guaranteed markets |       | 2,080                                              |       | 1,707 |   | 1,843 |   |
| Total                            |       | $                                                  | 7,130      |   | $ | 4,725 |   | $ | 3,395 |   |

 

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***Note 8.   Derivativesand Hedging Activities***

 

**Commodity Hedging Activities**

 

TheCompany has a risk management policy that is intended to reduce its financialexposure related to changes in the price of natural gas and electricity.  Under this policy, the Company hedges allanticipated natural gas and electricity commodity purchases required to meetexpected customer demand for all accounts served under fixed price contracts(up to 110% in the winter months with respect to customer demand in certainnatural gas utilities with daily balancing requirements and up to 110% in thesummer months with respect to customer demand in certain electricityutilities).

 

TheCompany has elected not to designate any of the derivative instruments ashedges under U.S. GAAP, and accordingly, all changes in fair value are adjustedthrough unrealized gains or losses from risk management activities in theconsolidated statements of operations.

 

Althoughthe Company engages in hedging activities with various counterparties forelectricity, the Company utilizes one particular hedge facility as its primarynatural gas hedge facility (the “Hedge Facility”).  Under the Hedge Facility, the Companyutilizes NYMEX referenced over-the-counter swaps, basis price swaps and optionsto hedge the risk of variability in the cost of natural gas.  The Hedge Facility was originally entered intoon August 1, 2006 and had an initial term of two years with subsequentone-year renewal terms.  In July 2008,the Company extended the Hedge Facility to the earlier of August 1, 2009 or 30days prior to expiration of the Revolving Credit Facility.  As of June 30, 2008, all of the Company’snatural gas hedge positions were with counterparties that had investment gradecredit ratings.

 

TheHedge Facility provides the Company with the ability to enter into NYMEX andbasis swaps for a tenor of up to 39 months. Fees under the Hedge Facilityinclude an annual management fee, a volumetric fee based on the tenor of theswap and other fees which allow the hedge provider to mitigate the potentialrisks arising from material declines of natural gas market prices based on theCompany’s overall hedge position with the provider.

 

TheHedge Facility is secured by a first lien on customer contracts and a secondlien on substantially all other assets of the Company.  The Company posted an initial balance of$25.0 million in cash collateral for potential negative mark-to-market changesin the value of the forward hedge position. The Company has the flexibility to post either cash collateral or issuea letter of credit as margin for the Hedge Facility.  As of June 30, 2008, the Company posteda $25.0 million letter of credit as margin.

 

Theagreement governing the Hedge Facility was amended in March 2008 and July 2008,as follows:

 

·                  InJuly 2008, the termination date was extended to the earlier of August 1,2009 or 30 days prior to expiration of the Revolving Credit Facility. As aresult of extension of the Revolving Credit Facility is currently due to expireon July 1, 2009.

·                  InJuly 2008, the collateral requirement was amended to require the Companyto increase the posted amount from $25.0 million to $35.0 million if itsmark-to-market exposure under the Hedge Facility exceeds $25.0 million;

·                  Priorto March 1, 2008, the Company was not required to post additionalcollateral beyond the initial margin requirements unless the amount of NYMEXreferenced forward swap hedge positions exceeded 65,000,000 MMBtus.  As a result of an amendment to the agreementgoverning the Hedge Facility, effective March 1, 2008, the Company willnot be required to post additional collateral unless its NYMEX referencedforward swap hedge positions exceed 35,000,000 MMBtus.  In July 2008, this limit was furtherreduced to 25,000,000 MMBtus; and

·                  Certainfinancial covenants, which are the same as those included in the agreementgoverning the Revolving Credit Facility (refer to Note 14 of these consolidatedfinancial statements) were also amended.

 

InSeptember 2008, the Company increased the letter of credit posted asmargin to $35.0 million because its mark-to-market exposure under the HedgeFacility exceeded $25.0 million.

 

TheCompany also utilizes swaps and fixed price contracts with variouscounterparties to hedge the variability in the cost of electricity.  As of June 30, 2008, 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 30,2008, all of the Company’s electricity hedge positions were with counterpartieswith investment grade credit ratings.

 

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Outstandinghedging contracts, which extend through August 2011, are summarized in thefollowing table.

** **
| ** **                                              | ** ** | **Open Contracts As Of June 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                                   | ** ** | **2007** | ** ** |
| **Natural gas (under the Hedge Facility):**             |       |                                                       |       |   |   |
| MMBtu(1)  NYMEX referenced over the  counter swaps | ** ** | **13,967,000**                                             |       | 18,703,000 |   |
| MMBtu basis swaps                                       | ** ** | **17,631,000**                                             |       | 14,641,000 |   |
|                                                    |       |                                                       |       |   |   |
| **Electricity:**                                        |       |                                                       |       |   |   |
| MWhrs(2) of swaps and fixed price  contracts       | ** ** | **106,000**                                                |       | 69,000 |   |

 

----

(1)   Million British thermal units

(2)   Million watt hours

 

TheCompany has a risk management policy that defines various risk managementcontrols and limits designed to monitor the Company’s risk position and ensurethat hedging performance is in line with objectives established by its Board ofDirectors and management.  The Company’srisk management policy prohibits speculative trading activities.

 

**Interest Rate Swaps**

 

InAugust 2006, the Company entered into two interest rate swaps to hedge thefloating rate interest expense on the Senior Notes:  (1) a $50.0 million swap that expired onAugust 1, 2008; and (2) an $80.0 million swap that expires on August 1,2011.  During the three months ended March 31,2008, the Company entered into a $30.0 million swap that expires on August 2,2010.  All swaps are fixed-for-floatingand settle against the six-month LIBOR rate. None of these interest rate swaps have been designated as a hedge and,accordingly, changes in the market value of the interest rate swaps are chargeddirectly to interest expense.  Theadditional interest expense associated with changes in the market value ofinterest rate swaps was $3.3 million and $0.9 million for the fiscal yearsended June 30, 2008 and 2007, respectively.

 

Thecarrying value of the interest rate swaps, which is recorded as a liability inunrealized losses from risk management activities on the consolidated balancesheets, was $4.6 million and $1.3 million at June 30, 2008 and 2007,respectively.

 

**Credit Risk Associated with Derivative FinancialInstruments**

 

TheCompany is exposed to credit risk associated with its hedging program andderivative financial instruments.  Creditrisk relates to the loss resulting from the nonperformance of a contractualobligation by a derivative counterparty. Historically, the Company has executed its fixed price derivativepositions to include a master netting agreement that mitigates the outstandingcredit exposure.  Under the HedgeFacility, the Company’s risk management activities are with a financialinstitution that has an AA-/Aa2 rating. To the extent that financial hedges or physical commodities are acquiredfrom other counterparties, the Company’s risk management policy set forthguidelines for monitoring, managing and mitigating credit risk exposures.  The risk management policy also establishescredit limits and requires ongoing financial reviews of counterparties.

 

***Note 9.   Goodwill***

 

TheCompany completed its annual impairment test of goodwill as of June 30,2008.  At the testing date, the Companydetermined that the fair value of each of its reporting units exceeded itscarrying value.  As a result, noimpairment loss was required to be recognized. Since the testing date, there were no material events, transactions orchanges in circumstances which warranted consideration for their impact on therecorded carrying value assigned to goodwill.

 

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***Note 10. CustomerAcquisition Costs, Net***

 

Customeracquisition costs and related accumulated amortization are summarized in thefollowing tables.

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

** **
| ** **                         | ** ** | **Balance at June 30, 2007** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **Gross Book Value**                   | ** ** | **Accumulated   Amortization** | ** ** | **Net Book Value** | ** ** |
| ** **                         | ** ** | **(in thousands)**                          | ** ** |
|                               |       |                                             |       |   |   |   |   |
| Customer contracts acquired        | ** ** | $                                                | 64,324     |   | $ | 34,034 |   | $ | 30,290 |   |
| Direct sales and advertising costs |       | 12,209                                           |       | 3,545 |   | 8,664 |   |
| Total customer acquisition costs   |       | $                                                | 76, 533    |   | $ | 37,579 |   | $ | 38,954 |   |

 

Amortizationexpense relating to capitalized customer acquisition costs was $23.4 million,$19.5 million and $6.2 million for the fiscal years ended June 30, 2008,2007 and 2006, respectively. Amortization expense associated with customer acquisition costscapitalized as of June 30, 2008 is estimated to be approximately $25.5million, $11.8 million and $4.4 million for the fiscal years ending June 30,2009, 2010 and 2011, respectively.

 

Thevalue and recoverability of customer acquisition costs are evaluated quarterlyby comparing their carrying value to their projected future cash flows on anundiscounted basis.  During the fiscalyear ended June 30, 2008, 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.

 

Asof June 30, 2008, the weighted-average amortization period for customeracquisition costs is 1.5 years.

 

***Note 11. FixedAssets, Net***

 

Fixedassets, net are summarized in the following table.

 
| ** **                                       | ** ** | ** **                             | ** ** | ** **       | ** ** | **Estimated** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|------------------|------------|---------------|------------|
| ** **                                       | ** ** | **Balance at June 30,** | ** ** | **Useful ** | ** ** |
| ** **                                       | ** ** | **2008**                               | ** ** | **2007**         | ** ** | **Lives**     | ** ** |
| ** **                                       | ** ** | **(in thousands)**                | ** ** | ** **       | ** ** |
|                                             |       |                                   |       |             |       |          |       |
| Computer equipment                               | ** ** | **$**                                  | **5,126**  | ** **       | $          | 4,476         |       | 3-5 years |   |
| Computer software and development                | ** ** | **25,583**                             | ** ** | 24,395           |       | 3 years       |       |
| Office furniture and equipment                   | ** ** | **1,479**                              | ** ** | 1,358            |       | 3-5 years     |       |
| ** **                                       |       | **32,188**                             | ** ** | 30,229           |       |          |       |
| Less: accumulated depreciation and  amortization | ** ** | **(21,663**                            | **)**      | (12,380          | )          |          |       |
| Net                                              | ** ** | **$**                                  | **10,525** | ** **       | $          | 17,849        |       |   |   |

 

Duringthe fiscal year ended June 30, 2008, The Company capitalized approximately$1.0 million of software development costs related to a project designed toreduce the number of software packages utilized to service customer accountsand to enhance the overall capabilities of existing software.

 

Depreciationexpense relating to computer equipment, office furniture and other equipmentwas $1.6 million, $1.7 million and $1.2 million for the fiscal years ended June 30,2008, 2007 and 2006, respectively. Amortization expense relating to capitalized computer software costs was$7.7 million, $6.4 million and $1.1 million for the fiscal years ended June 30,2008, 2007 and 2006, respectively.

 

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***Note 12. IncomeTaxes***

 

Incometax (expense) benefit consists of the following:

 
| ** **                         | ** ** | **Fiscal Years ended June 30** | ** **  |
|------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                         | ** ** | **2008**                                           | ** **  | **2007** | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(in thousands)**                            | ** **  |
| Current:                           |       |                                               | ** **  |   |   |   |   |
| Federal                            | ** ** | **$**                                              | **599**     | ** ** | $ | (4,750 | ) | $ | (5,595 | ) |
| State                              | ** ** | **434**                                            | ** **  | (1,204 | ) | (168 | ) |
| ** **                         |       | **1,033**                                          | ** **  | (5,954 | ) | (5,763 | ) |
| Deferred:                          |       |                                               | ** **  |   |   |   |   |
| Federal                            | ** ** | **(15,000**                                        | **)**       | 13,249 |   | 25,683 |   |
| State                              | ** ** | **(3,188**                                         | **)**       | 1,200 |   | 7,081 |   |
| ** **                         |       | **(18,188**                                        | **)**       | 14,449 |   | 32,764 |   |
| Total income tax (expense) benefit | ** ** | **$**                                              | **(17,155** | **)** | $ | 8,495 |   | $ | 27,001 |   |

 

TheCompany incurred a current tax loss for fiscal 2008, which it intends to carryback to the 2007 tax year.

 

Theprovision for income taxes varied from income taxes computed at the statutoryU.S. federal income tax rate as a result of the following:

 
| ** **                                                             | ** ** | **2008** | ** ** | **2007**   | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                                                   |       |     | ** ** |       |       |     |       |
| Federal statutory rate                                                 | ** ** | **35.0** | **%**      | 35.0       | %          | 35.0     | %          |
| State statutory rate, net of federal  benefit                          | ** ** | **4.5**  | ** ** | 5.4        |       | 5.7      |       |
| Total                                                                  | ** ** | **39.5** | ** ** | 40.4       |       | 40.7     |       |
| Impact of prior year adjustments on current  and deferred income taxes | ** ** | **(0.6** | **)**      | **—** |       | 0.1      |       |
| Impact of changing tax rates on prior year  deferred balances          | ** ** | **1.0**  | ** ** | (0.1       | )          | —   |       |
| Impact of permanent differences                                        | ** ** | **1.0**  | ** ** | (2.2       | )          | (0.4     | )          |
| Effective tax rate                                                     | ** ** | **40.9** | **%**      | 38.1       | %          | 40.4     | %          |

 

Thehigher effective tax rate for the fiscal year ended June 30, 2008 wasprimarily due to changes in the mix and amounts of permanent differences.

 

Thestate statutory rate for the fiscal year ended June 30, 2008 decreased to4.5%, as a result of income apportionment for the states in which the Companydoes business.

 

TheCompany adopted FIN No. 48 effective July 1, 2007 (refer to Note 3 ofthese consolidated financial statements).  There was no material impact on the Company’s recorded retained earningsas a result of the adoption of FIN No. 48.

 

Majortaxing jurisdictions for the Company and tax years for each that remain subjectto examination are as follows:

 
| **Taxing Jurisdiction** | ** ** | **Open Years** | ** ** |
|------------------------------|------------|---------------------|------------|
|                         |       |                |       |
| U.S. Federal                 |       | 2004 and later      |       |
| U.S. states and cities       |       | 2004 and later      |       |
| Canada                       |       | 2004 and later      |       |

 

The Company recognizesaccrued interest and penalties related to income tax liabilities as accruedliabilities in the consolidated balance sheet and interest expense in theconsolidated statement of operations.  Asof July 1, 2007, the Company had accrued approximately $0.2 million forpotential interest and penalties for the uncertain tax position related to thesettlement of derivatives described below. Most of this amount was paid in the third quarter of the fiscal yearended June 30, 2008.

 

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Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amount of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. The Company expects to fullyrecognize its deferred tax assets recorded at June 30, 2008.  The significant components of the Company’sdeferred tax assets and liabilities are summarized in the following table.

 
| ** **                                             | ** ** | **Balance at June 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                | ** ** |
| **Deferred tax assets:**                               |       |                                   |       |   |   |
| Allowance for doubtful accounts                        | ** ** | **$**                                  | **2,035**  | ** ** | $ | 2,125 | ** ** |
| Accrued bonuses                                        | ** ** | **1,090**                              |       | — |   |
| Other reserves                                         | ** ** | **122**                                |       | 133 |   |
| Depreciation and amortization                          | ** ** | **12,877**                             |       | 6,438 |   |
| Net unrealized losses from risk management  activities |       | —                                 |       | 8,327 |   |
| Stock compensation expense                             | ** ** | **1,664**                              |       | 1,867 |   |
| Total deferred tax assets                              | ** ** | **17,788**                             |       | 18,890 |   |
| **Deferred tax liabilities:**                          |       |                                   |       |   |   |
| Net unrealized gains from risk management  activities  | ** ** | **(17,085**                            | **)**      | — |   |
| Total deferred tax liabilities                         | ** ** | **(17,085**                            | **)**      | — |   |
| Net deferred tax asset                                 | ** ** | **$**                                  | **703**    | ** ** | $ | 18,890 |   |
|                                                   |       |                                   | ** ** |   |   |
| **Balance sheet classification:**                      |       |                                   | ** ** |   |   |
| Current deferred tax asset                             | ** ** | **$**                                  | **—** | ** ** | $ | 9,136 | ** ** |
| Long-term deferred tax asset                           | ** ** | **10,503**                             | ** ** | 9,754 |   |
| Current deferred tax liability                         | ** ** | **(9,800**                             | **)**      | — |   |
| Net deferred tax asset                                 | ** ** | **$**                                  | **703**    |   | $ | 18,890 |   |

 

Asummary of activity related to uncertain tax positions for the fiscal yearended June 30, 2008 follows:

 
| ** **                                      | ** ** | **Amount**             | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **(in millions)** | ** ** |
| Unrecognized tax benefit at July 1,  2007  |       | $                      | 1.7        |   |
| Decreases from payments during the fiscal  year |       | (0.8                   | )          |
| Unrecognized tax benefit at June 30,  2008 |       | $                      | 0.9        |   |

 

Asof July 1, 2007, the Company had an uncertain tax position of $0.8 millionrelated to the settlement of derivatives used as commodity hedges during fiscalyears ended June 30, 2005 and 2004. During the fiscal year ended June 30, 2008, the Company filed anamended return for 2004.  The Companyintends to file amended tax returns for 2005 during the fiscal year ending June 30,2009.  The Company had previously accrueda current tax liability of $0.8 million at June 30, 2007, which was paidupon filing the amended 2004 tax return.

 

Alsoat July 1, 2007, the Company had an uncertain tax position of $0.9 millionfor a compensation related timing issue. There was no change to this amount during the fiscal year ended June 30,2008.  The Company does not expect thisitem to be settled within the next twelve months.  There is no change in the effective tax rateas a result of this item.

 

Duringthe fiscal year ended June 30, 2008, the Company identified an uncertaintax position related to interest expense deductions.  This position relates to certain state incometax returns filed for the fiscal year ended June 30, 2007 and to the stateincome tax provision recorded for the nine months ended March 31,2008.  During the fourth quarter offiscal 2008, the Company executed agreements allowing interest expense to be deductedfor state tax purposes.  Therefore, thisitem is no longer considered to be an uncertain tax position as of June 30,2008.

 

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***Note 13. AccountsPayable and Accrued Liabilities***

 

Accountspayable and accrued liabilities are summarized in the following table.

 
| ** **                                                | ** ** | **Balance at June 30,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                | ** ** |
|                                                      |       |                                   |       |   |   |
| Interest payable                                          | ** ** | **$**                                  | **11,662** |   | $ | 13,118 |   |
| Trade accounts payable and accrued  liabilities (1)       | ** ** | **14,427**                             |       | 10,047 |   |
| Accrued payroll and related liabilities                   | ** ** | **3,824**                              |       | 2,885 |   |
| Sales and other taxes                                     | ** ** | **1,291**                              |       | 1,928 |   |
| Customer contracts acquired in business  combinations (2) | ** ** | **699**                                |       | 1,673 |   |
| Other                                                     | ** ** | **4,699**                              |       | 1,877 |   |
| Total accounts payable and accrued  liabilities           | ** ** | **$**                                  | **36,602** |   | $ | 31,528 |   |

 

----

| (1) |   | Includes  $0.3 million and $0.6 million, respectively, due to related parties for legal  services, financial advisory services and management fees. Refer to Note 18  of these consolidated financial statements for additional information.                 |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Represents  customer contracts acquired that had contract terms below market rates at the  respective dates of acquisition. Such amounts are amortized through cost of  natural gas and electricity sold as the Company makes delivery under the  contracts. |

 

Interestpayable relates primarily to accrued interest on the Senior Notes.  Trade accounts payable and accrued expensesrelate primarily to transportation and distribution charges, imbalances andother utility-related expenses.

 

***Note 14. RevolvingCredit Facility***

 

MXenergy Inc.and MXenergy Electric Inc. are borrowers under a revolving credit facilitywith a syndicate of banks (the “Revolving Credit Facility”).  As of June 30, 2008, the maximum amountthat could be borrowed under the Revolving Credit Facility was the lesser of: (1) $280.0 million;or (2) the amount of the then applicable borrowing base.  The expiration date of the Revolving CreditFacility was December 19, 2008, at which time any outstanding principalamounts would have become due. Borrowings under the Revolving Credit Facility bore interest at afluctuating rate based upon a base rate or a Eurodollar rate plus an applicablemargin.  As of June 30, 2008, theapplicable margin for base rate loans was 1.00% per annum and the applicablemargin for Eurodollar loans was 2.00% per annum.  As of June 30, 2008, the fees associatedwith issuing letters of credit were 1.75% per annum.

 

AtJune 30, 2008, the total availability under the Revolving Credit Facilitywas $193.9 million, of which $147.9 million was utilized in the form ofoutstanding letters of credit.  TheCompany did not draw any borrowings under the Revolving Credit Facility duringthe fiscal year ended June 30, 2008, and there were no cash borrowings outstandingunder the Revolving Credit Facility at June 30, 2008.

 

OnSeptember 30, 2008, the agreement that governs the Revolving CreditFacility was amended and restated.  The amendedand restated agreement includes the following amendments to the previousagreement

 

·                  The maturity date of the Revolving CreditFacility was extended through July 31, 2009.

·                  The maximum amount that the Company ispermitted to borrow was reduced to $255.0 million.  The amendment allows for new lenders to beadded to the Revolving Credit Facility subsequent to closing, which couldincrease the maximum amount available for the Company to borrow to $280.0million.

·                  The Company paid an upfront amendment closingfee of 0.75% of the aggregate commitment under the Revolving Credit Facility,which will be amortized to interest expense from October 2008 through July 2009.

·                  The margins for based rate loans wereincreased by 1.00%.

·                  The fee associated with issuing letters ofcredit was increased to 2.75% per annum. Various other fees under the facility were also increased.

·                  The Company is required to borrow anyavailable balance under the Denham Credit Facility no later than November 7,2008.

·                  The Company may not acquire customerportfolios or operations of other companies without explicit approval bylenders holding a majority of the commitments under the Revolving CreditFacility.

·                  The maximum Average Leverage Ratio (averagedebt for the 12 months preceding a reporting period, divided by adjusted EBITDAfor the same period) for the period from February 1, 2009 through theexpiration date was lowered to 3.75 from 4.00.

 

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TheRevolving Credit Facility contains customary covenants that restrict certain ofthe Company’s activities including, among others, limitation on capitalexpenditures, disposal of property and equipment, additional indebtedness,issuance of capital stock and dividend payments.  Financial covenants under the RevolvingCredit Facility include, among others, minimum tangible net worth, minimumworking capital and interest coverage, each as defined in the agreement thatgoverns the Revolving Credit Facility. The Revolving Credit Facility was amended during the fiscal year ended June 30,2008 to reflect changes in the financial thresholds of certain covenants.  The Revolving Credit Facility also containscustomary events of default.  The Companywas in compliance with the covenants under the Revolving Credit Facility at June 30,2008.

 

***Note 15. FloatingRate Senior Notes due 2011***

 

OnAugust 4, 2006, the Company issued $190.0 million aggregate principalamount of Senior Notes that mature on August 1, 2011. The Senior Noteswere issued at 97.5% of par value, and bear interest at a rate equal to LIBORplus 7.5% per annum.  Interest is resetand payable semi-annually on February 1 and August 1 of eachyear.  The interest rate on the SeniorNotes was 10.6863% as of June 30, 2008, and was reset to 10.6250% on August 1,2008.  The weighted-average interest ratewas 11.9462% and 12.9650% for the fiscal years ended June 30, 2008 and2007, respectively.  The Company hasentered into interest rate swap agreements to hedge the floating rate interestexpense on the Senior Notes (refer to Note 8 of these consolidated financialstatements).

 

Totalinterest expense associated with the Senior Notes, excluding the impact ofmark-to-market adjustments related to interest rate swaps, was $21.0 millionand $21.2 million for the fiscal years ended June 30, 2008 and 2007,respectively.

 

Theoriginal issue discount of approximately $4.8 million is being amortized tointerest expense ratably over the term of the Senior Notes.  Amortization of original issue discount tointerest expense for the fiscal years ended June 30, 2008 and 2007 was$1.1 million and $1.0 million, respectively. These amounts include the impact of the early extinguishment of SeniorNotes discussed in the following paragraphs.

 

OnDecember 13, 2006, the Company purchased $12.0 million aggregate principalamount of Senior Notes outstanding, plus accrued interest, from a noteholderfor an amount less than face value.  TheCompany utilized its credit facility with Denham Commodity Partners Fund LP(refer to Note 18 of these consolidated financial statements) to acquire suchSenior Notes.  This transaction resultedin a gain on early extinguishment of debt of approximately $1.0 million, whichwas recorded as a reduction of interest expense for the fiscal year ended June 30,2007.  The Company also recorded asadditional interest expense $0.6 million of original issue discount and debtissuance costs for the fiscal year ended June 30, 2007, which represents apro rata portion of such costs that were deferred at the issuance date of theSenior Notes.

 

Duringthe fiscal year ended June 30, 2008, the Company utilized cash and cashequivalents to acquire $12.8 million aggregate principal amount of outstandingSenior Notes from noteholders, in each case, for an amount less than face value.  These transactions resulted in $0.8 millionof aggregate gains on the early extinguishment of debt that was recorded as areduction of interest expense for the fiscal year ended June 30,2008.  The Company also recorded as additionalinterest expense $0.5 million of original issue discount and debt issuancecosts for the fiscal year ended June 30, 2008, which represents a pro rataportion of such costs that were deferred at the issuance date of the SeniorNotes.

 

Onor before August 1, 2009, upon an equity offering, the Companymay redeem up to 35% of the aggregate principal amount of the Senior Notesat a price equal to the sum of (1) 100% of the principal amount; (2) apremium equal to the rate per annum on the balance outstanding on the datenotice is given to redeem the Senior Notes; and (3) accrued and unpaidinterest as of the redemption date.  If achange of control, as defined in the indenture governing the Senior Notes, wereto occur, the Company would be obligated to make an offer to purchase theSenior Notes, in whole or in part, at a price equal to 101% of their aggregateprincipal amount, plus accrued and unpaid interest, if any, as of the date ofpurchase.  If a change of control were tooccur, the Company may not have the financial resources to repay all ofits obligations under the Senior Notes. During the fiscal year ended June 30, 2008, there was no change incontrol, as defined in the indenture governing the Senior Notes, which wouldobligate the Company to purchase the Senior Notes.

 

Holdings,the issuer of the Senior Notes, has no significant independent operations.  Each of Holdings’ domestic U.S. subsidiariesjointly and severally, fully and unconditionally guarantees the Senior Notes ona senior unsecured basis.  Refer to Note22 of these consolidated financial statements for consolidating financialstatements of Holdings and its guarantor and non-guarantor subsidiaries.

 

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Theindenture governing the Senior Notes contains restrictions on Holdings and itsdomestic subsidiaries with regard to declaring or paying any dividend ordistribution on Holdings capital stock. As of June 30, 2008, the Company was in compliance with allprovisions of the indenture governing the Senior Notes.

 

***Note 16. Redeemable  Convertible Preferred Stock***

 

Holdingsis authorized to issue 5,000,000 shares of redeemable convertible preferredstock.   On June 30, 2004, MXenergyInc. entered into a purchase agreement (the “Preferred Stock Purchase Agreement”)with affiliates of Charterhouse Group Inc. and Greenhill Capital Partners LLC(collectively, the “Preferred Investors”) to issue 1,451,310 shares ofPreferred Stock at a purchase price of $21.36 per share.  During the fiscal year ended June 30,2005, as part of a corporate reorganization, MXenergy Inc. merged with asubsidiary of Holdings to become a wholly owned subsidiary of Holdings andstockholders of MXenergy Inc. became stockholders of Holdings.  Total related offering expenses ofapproximately $1.6 million were deducted from the carrying value of thePreferred Stock, which resulted in a net carrying value of approximately $29.4million at June 30, 2007.

 

The Company has determined that the Preferred Stock is redeemable at theoption of the Preferred Investors as a result of the redemption provisionsincluded in the Preferred Stock Purchase Agreement.  Therefore, the Preferred Stock is recordedoutside of stockholders’ equity on the consolidated balance sheets.  As of June 30, 2008, the Company hasdetermined that it is probable that the Preferred Stock will become redeemableat June 30, 2009, which is the earliest possible date that the PreferredInvestors may cause the Company to make the redemption election described under“Redemption Rights” below.  Therefore, asof June 30, 2008, the carrying value of the Preferred Stock has been adjustedto reflect the estimated redemption value, assuming the Preferred Stock wasredeemed on June 30, 2008.  Accordingly,the carrying value of Preferred Stock was increased to its estimated $48.8million redemption value at June 30, 2008, which represents the amount that providesthe Preferred Investors with a minimum annual rate of return of 12%, compoundedannually through June 30, 2008, as guaranteed to the Preferred Investors underthe dividend provisions of the Preferred Stock Purchase Agreement (see“Dividend Rights” below) with a corresponding charge of $19.4 million recordedto retained earnings.

 

**Dividend Rights**

 

ThePreferred Investors are entitled to participate in any dividend paid onHoldings’ common stock on an “as converted” basis.  In addition, the Preferred Investors areentitled to dividends at a rate of 12% per annum, compounded annually, from June 30,2004 until the occurrence of a redemption date, if any (see “Redemption Rights”below for additional information).  Suchdividends are cumulative and payable when and if any dividend is declared byHoldings on any class of its outstanding capital stock.

 

Holdings’ability to pay any cash dividends is limited by debt covenants and otherprovisions of the agreements that govern the Hedge Facility, the RevolvingCredit Facility and the Senior Notes.  Therefore,Holdings did not declare or accrue any dividends during the fiscal years ended June 30,2008 or 2007.

 

**Conversion Rights**

 

ThePreferred Investors have the right at any time to convert their shares ofPreferred Stock into shares of Holdings’ common stock.   Upon conversion, the number of shares ofcommon stock to be issued shall be the number of shares of Preferred Stockoutstanding; adjusted in accordance with conversion provisions in the PreferredStock Purchase Agreement that guarantee the Preferred Investors a minimumannual rate of return equal to 12% per annum, compounded annually.  The conversion price is subject to certainanti-dilution provisions included in the Preferred Stock Purchase Agreement.

 

Asof June 30, 2008, 1,451,310 shares of Holdings’ common stock were reservedfor issuance upon conversion of the Preferred Stock.

 

**Redemption Rights**

 

Atany time on or after the fifth anniversary of the issuance of the PreferredStock, the Company may redeem all, but not less than all, of the outstandingshares of Preferred Stock with cash if, as of the date a notice of redemptionis provided to the Preferred Investors, the fair market value of Holdings’common stock is at a level that would provide an annual rate of return of notless than 40%, compounded annually, to the majority of the PreferredInvestors.  The redemption price pershare would be equivalent to the fair market value of Holdings’ common stock onthe redemption date.

 

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Onor after the fifth anniversary of the issuance of the Preferred Stock, if thefair market value of Holdings’ common stock is at a level that would notprovide the Preferred Investors with an annual rate of return of at least 25%,compounded annually, for the five-year period ending June 30, 2009, thePreferred Investors may require that the Company make a redemptionelection.  If the Company elects toredeem the Preferred Stock, the redemption amount is payable in cash equal tothe greater of: (1) the fair market value of the shares of common stock intowhich the Preferred Stock may be converted on the date of the redemptionelection notice; or (2) the original issue price of $21.36 per share, plus anyaccrual of dividends described above under “Dividend Rights”.  If the Company elects not to elect to redeemthe Preferred Stock, it is required to grant the Preferred Investors effectivecontrol over Holding’s Board of Directors. As of June 30, 2008, the Company does not expect to redeem thePreferred Stock due to limitations included in the agreements that govern theRevolving Credit Facility, the Hedge Facility and the Senior Notes.  However, since the Preferred Investors wouldeffectively control the Company’s Board of Directors in the event that theCompany does not elect to redeem the Preferred Stock, the Company hasdetermined that the Preferred Stock is redeemable at the option of thePreferred Investors and, accordingly, has classified the Preferred Stockoutside of stockholders’ equity on the consolidated balance sheets.

 

**Liquidation Preference**

 

Ifa liquidation event, as defined in the Preferred Stock Purchase Agreement, wereto occur, the Preferred Investors would be entitled to receive an amount pershare of Preferred Stock equal to the greater of: (1) the originalpurchase price per share paid by the Preferred Investors, adjusted fordividends accrued or declared and unpaid as of the liquidation date; or (2) theamount per share of Preferred Stock that the Preferred Investors would havereceived if it had converted its shares of Preferred Stock into shares ofHoldings’ common stock immediately prior to the liquidation event.  As of June 30, 2008, no liquidationevent has occurred, as defined in the Preferred Stock Purchase Agreement.

 

**Voting Rights**

 

Holdersof the Preferred Stock are entitled to vote on all matters to be voted on byHoldings’ stockholders and shall vote on an as-converted basis as a singleclass with Holdings’ common stockholders.

 

***Note 17. CommonStock***

 

**Stock-Based Compensation Plans**

 

Thepurpose of the Company’s stock-based compensation plans is to attract andretain qualified employees, consultants and other service providers byproviding them with additional incentives and opportunities to participate inthe Company’s ownership, and to create interest in the success and increasedvalue of the Company.  The plans areadministered by the 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’ common stockat the grant date, vest ratably based on three years of continuous service andhave ten year contractual terms.

 

TheCompany has three active stock-based compensation plans under which warrantsand options (collectively referred to as “awards”) have been granted toemployees, directors and other non-employees:

 

·                  *2001 Incentive Stock Option Plan (the “2001 ISO Plan”)* –  The2001 ISO Plan allows for awards of stock or stock options not to exceed the366,500 shares of Holdings’ common stock reserved as a pool for distribution toemployees and non-employees.  As of June 30,2008, there were no shares available under the 2001 ISO Plan for future award.

·                  *2003 Incentive Stock Option Plan (the “2003 ISO Plan”)–* The 2003 ISO Plan allowsfor awards of stock or stock options not to exceed the 400,000 shares ofHoldings’ common stock reserved as a pool for distribution to employees andnon-employees.  As of June 30, 2008,there were 6,946****shares availableunder the 2003 ISO Plan for future award.

·                  *2006 Equity Incentive Compensation Plan (the “2006EIC Plan”) –* The 2006 EICPlan allows for awards of options, restricted stock, phantom shares, dividendequivalent rights performance awards or stock appreciation rights, toemployees, members of the Board of Directors, officers, consultants and otherservice providers.  Up to 750,000 sharesof Holdings’ common stock have been authorized to be issued for awards underthe 2006 EIC Plan.  As of June 30,2008, 326,166 shares were available under the 2006 EIC Plan for futureaward.  The adoption of the 2006 EIC Planhad no impact on the 2001 ISO Plan or the 2003 ISO Plan.

 

Thefair value of each option award granted subsequent to June 30, 2006, isestimated on the grant date using a Black-Scholes-Merton option valuation model.  Certain key assumptions used in the modelincluded share price volatility, expected term, risk-free interest rate andexpected forfeiture rate.

 

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Pursuantto employment contracts entered into during the fiscal year ended June 30,2008, the Company granted options for 7,500 shares of Holdings’ common stockthat vest ratably over a three-year period and that expire 10 years from thegrant date.   The Company recorded lessthan $0.1 million of compensation expense during the fiscal year ended June 30,2008 and expects to record less than $0.1 million of compensation expenseduring each of the fiscal years ending June 30, 2009, 2010 and 2011related to this award.  The Company didnot grant any other awards of options under any of its stock-based compensationplans during the fiscal year ended June 30, 2008.

 

Asof June 30, 2008, 1,079,820 options to purchase common stock wereoutstanding under the Company’s three approved stock-based compensation plans,for which the Company expects to record approximately $0.9 million, $0.2million and $0 of compensation expense in general and administrative expensesduring the fiscal year ending June 30, 2009, 2008 and 2007, respectively.

 

Asof June 30, 2008, 34,600 options to purchase common stock have been issuedto two non-employee directors of the Company. These options have a weighted average exercise price of $12.75 per shareand are fully-vested as of June 30, 2008.

 

**Warrants Issued to Employees and Related Parties**

 

TheCompany has issued warrants to purchase common stock to certain employees andrelated parties that were not issued under any of the Company’s three approvedstock-based compensation plans.  As of June 30,2008, the Company had 41,500 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 related to thesewarrants was ($0.5) million (($0.3) million net of tax), $2.3 million ($1.4million net of tax) and $0.9 million ($0.6 million net of tax) during thefiscal years ended June 30, 2008, 2007 and 2006, respectively.

 

Asof June 30, 2008, the Company had 1,544,736 fully-vested warrants topurchase common stock outstanding, held by Denham, with a weighted averageexercise price of $9.79 per share.  Thesewarrants are not subject to variable plan accounting because there is no futurerequirement to provide any services to the Company in order for Denham toexercise the warrants.  Therefore, theCompany did not record any expense related to these warrants during the fiscalyears ended June 30, 2008, 2007 or 2006. In September 2008, Denham exercised these warrants in a cashlesstransaction, resulting in the issuance of 1,130,163 shares of the Company’scommon stock.

 

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Outstandingawards of all options and warrants to purchase common stock are summarized inthe following tables.

 
| ** **                                                                       | ** ** | **Awards Outstanding at June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                       | ** ** | **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                                                 | ** ** | **2,931,406**                                          | ** ** | **$** | **16.35** |   | 2,538,106 |   | $ | 10.87 |   | 2,696,706 |   | $ | 10.70 |   |
| Granted                                                                          | ** ** | **7,500**                                              | ** ** | **50.10** |   | 508,000 |   | 42.90 |   | 4,500 |   | 32.50 |   |
| Exercised                                                                        | ** ** | **(224,417**                                           | **)**      | **4.18** |   | (29,000 | ) | 3.08 |   | (132,967 | ) | 4.23 |   |
| Forfeited                                                                        | ** ** | **(48,433**                                            | **)**      | **33.57** |   | (40,700 | ) | 28.73 |   | (30,133 | ) | 25.41 |   |
| Expired                                                                          |       | **—**                                             | ** ** | **—** |   | (45,000 | ) | 4.40 |   | — |   | — |   |
| Outstanding at end of year                                                       | ** ** | **2,666,056**                                          | ** ** | **17.16** |   | 2,931,406 |   | 16.35 |   | 2,538,106 |   | 10.87 |   |
| Weighted average fair value of grants  during the year                           | ** ** | ** **                                             |       | **$** | **13.70** |   |   |   | $ | 12.31 |   |   |   | $ | 11.72 |   |
|                                                                             |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Total intrinsic value of awards outstanding  at June 30, 2008 (in millions) | ** ** | **$**                                                  | **42.3**   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                  |            |                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **            | ** ** | **Awards Outstanding at June 30,** | ** ** |
|-----------------------|------------|--------------------------------------------------------|------------|
| ** **            | ** ** | **2008**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| **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                 | ** ** | **100,000**                                            | ** ** | **100,000** | ** ** | **3.7 Years** |   | 110,000 |   | 110,000 |   | 120,000 |   | 120,000 |   |
| $2.16                 |       | —                                                 |       | — | ** ** | **0.0 Years** |   | 132,450 |   | 132,450 |   | 132,450 |   | 132,450 |   |
| $3.72 –  $5.35   | ** ** | **10,000**                                             | ** ** | **10,000** | ** ** | **3.7 Years** |   | 47,500 |   | 47,500 |   | 110,000 |   | 110,000 |   |
| $6.99 –  $9.12   | ** ** | **1,163,263**                                          | ** ** | **1,163,263** | ** ** | **1.3 Years** |   | 1,215,863 |   | 1,215,863 |   | 1,229,663 |   | 1,199,196 |   |
| $11.64 –  $15.00 | ** ** | **562,573**                                            | ** ** | **562,573** | ** ** | **0.7 Years** |   | 562,573 |   | 562,573 |   | 562,573 |   | 559,573 |   |
| $21.50 –  $25.00 | ** ** | **233,820**                                            | ** ** | **233,820** | ** ** | **4.8 Years** |   | 234,420 |   | 162,947 |   | 239,020 |   | 89,507 |   |
| $27.50 –  $32.50 | ** ** | **128,500**                                            | ** ** | **128,500** | ** ** | **6.1 Years** |   | 136,300 |   | 91,200 |   | 144,400 |   | 48,967 |   |
| $42.57 –  $50.10 | ** ** | **467,900**                                            | ** ** | **157,067** | ** ** | **8.0 Years** |   | 492,300 |   | 5,000 |   | — |   | — |   |
| ** **            | ** ** | **2,666,056**                                          | ** ** | **2,355,223** |   |   |   | 2,931,406 |   | 2,327,533 |   | 2,538,106 |   | 2,259,693 |   |

 

Theweighted-average remaining term for all outstanding awards as of June 30,2008 was approximately 3 years.  Theweighted-average remaining term for all exercisable awards as of June 30,2008 was approximately 2.3 years.  Theweighted average exercise price of awards exercisable as of June 30, 2008was $13.74.

 

Duringthe fiscal years ended June 30, 2008, 2007 and 2006, awards were exercisedfor 181,511, 29,000 and 132,967 shares of Holdings’ common stock,respectively.  The aggregate proceeds ofthese exercises were $0.4 million, less than $0.1 million, and $0.6 million forthe fiscal years ended June 30, 2008, 2007 and 2006, respectively.   The tax benefit for the Company from theexercise of warrants was approximately $0.8 million, $0.2 million and $0 forthe fiscal years ended June 30, 2008, 2007 and 2006, respectively, andwere recorded as a reduction of current tax liability and an increase toadditional paid-in capital.

 

**Common Stock Issued to Senior Executives**

 

InMarch 2008, the Compensation Committee of the Company’s Board of Directorsapproved the issuance of 19,000 aggregate fully vested shares of Holdings’common stock 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.

 

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***Note 18. RelatedParty Transactions***

 

**Credit Agreement with Denham Commodity Partners FundLP**

 

DenhamCommodity Partners Fund LP (“Denham”) is a significant stockholder of theCompany.  Denham has extended a $12.0million line of credit to the Company, which bears interest at 9% per annum(the “Denham Credit Facility”).  Thetermination date for the Denham Credit Facility is May 19, 2010, at whichtime any outstanding principal balance becomes due.   The Company had $0 and $11.0 million ofborrowings outstanding under the Denham Credit Facility at June 30, 2008and 2007, respectively.  In December 2007,the Denham Credit Facility agreement was amended to allow the Company to drawprincipal until November 14, 2008. In January 2008, the Company repaid the entire $11.0 millionprincipal balance outstanding under the Denham Credit Facility.  Interest expense related to the Denham CreditFacility was $0.5 million, $0.5 million and $0 for the fiscal years ended June 30,2008, 2007 and 2006, respectively.

 

Inaccordance with the September 30, 2008 amendment and restatement of theagreement that governs the Revolving Credit Facility (refer to Note 14), theCompany is required to borrow any available balance under the Denham CreditFacility prior to November 7, 2008, and to maintain such balanceoutstanding until the Revolving Credit Facility expires on July 31,2009.  In October 2008, the Companyborrowed the entire $12.0 million balance available under the Denham CreditFacility.

 

**Legal Services**

 

Adirector and significant stockholder of the Company is a senior partner ofPaul, Hastings, Janofsky & Walker LLP (“Paul Hastings”), a law firm thatprovides legal services to the Company. During the fiscal years ended June 30, 2008, 2007 and 2006, PaulHastings provided the Company with legal services totaling $0.6 million, $1.2million and $1.4 million, respectively, of which $0.6 million, $0.8 million and$1.4 million, respectively, were for general legal services recorded as generaland administrative expenses.  Theremaining $0.4 million of fees for the fiscal year ended June 30, 2007,primarily related to issuance of debt and acquisitions and were deferred on theconsolidated balance sheets, to be amortized over the estimated useful livesassociated with the related transactions. The Company expects that Paul Hastings will continue to provide legalservices to the Company in future periods.

 

**Financial Advisory Services**

 

Infiscal 2005, the Company entered into a consulting agreement with GreenhillCapital Partners (“GCP”), a significant stockholder of the Company, to serve asa financial advisor. The agreement provided for payment of quarterly retainerfees that totaled $0.3 million annually and additional fees contingent upon thesuccessful completion of certain transactions specified in the agreement. TheCompany recorded general and administrative expenses of $0.1 million and $0.3million for the fiscal years ended June 30, 2007 and 2006, respectively,pertaining to this agreement. The retainer arrangement with GCP expired on September 30,2006.

 

InMay 2007, the Company entered into a financial advisory services agreementwith Greenhill & Co., LLC, an affiliate of GCP, pursuant to which theCompany pays Greenhill & Co., LLC quarterly fees that total $0.3million annually, and may incur other charges based on the occurrence of atransaction, as defined in such agreement. The Company recorded $0.3 million of general and administrative expensesduring the fiscal year ended June 30, 2008 related to this agreement.

 

**ManagementFees**

 

Effective for the three months ended September 30,2007, the Company agreed to pay Denham, Daniel Bergstein and Charter Mx LLC,another significant stockholder of the Company, an aggregate annual fee of $0.9million, payable in equal quarterly amounts, for management consulting servicesprovided to the Company.  These fees arerecorded as general and administrative expenses on the Company’s consolidatedstatements of operations.

 

***Note 19. EmployeeBenefits***

 

TheCompany sponsors an employee savings plan under Section 401(k) of theInternal Revenue Code for all full-time employees with at least three months ofcontinuous service.  Eligible employeesmay make pre-tax contributions up to 20% of their annual compensation, notto exceed the annual limitation set forth in Section 402 (g) for anyplan year. The Company makes a matching contribution of up to 10% of eachparticipating employee’s compensation up to the maximum allowable under theplan.  Employees whose employment date isprior to July 1, 2007, are immediately 100% vested in allcontributions.  Employer contributionsfor employees whose employment date is on or after July 1, 2007 will vestin increments of 25% 

 

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peryear.  The Company made contributions of$1.3 million, $1.0 million and $0.6 million for the fiscal years ended June 30,2008, 2007 and 2006, respectively.  Theincrease in expense from fiscal year 2007 to fiscal year 2008 was primarily dueto increased staffing levels.

 

***Note 20. Commitmentsand Contingencies***

 

**Operating Leases**

 

TheCompany leases office space under non-cancelable operating leases, whichcontain escalation clauses, have terms that expire between July 2009 and October 2017and are subject to extension at the option of the Company.  The Company takes into account all escalationclauses when determining the amount of future minimum lease payments.  All future minimum lease payments arerecognized on a straight-line basis over the minimum lease term.  Rental expense related to the above leasedspaces was $1.3 million, $1.6 million and $0.5 million for the fiscal yearsended June 30, 2008, 2007 and 2006, respectively.  Future annual minimum lease payments underoperating leases are summarized in the following table.

 
| **Fiscal year:** | ** ** | **Amount**              | ** ** |
|-----------------------|------------|-------------------------|------------|
| ** **            | ** ** | **(in thousands)** | ** ** |
| 2009                  |       | $                       | 973        |   |
| 2010                  |       | 760                     |       |
| 2011                  |       | 232                     |       |
| 2012                  |       | 209                     |       |
| 2013                  |       | 234                     |       |
| Thereafter            |       | 1,077                   |       |
| Total                 |       | $                       | 3,485      |   |

 

**Energy Trading & Risk Management System**

 

InJune 2005, the Company entered into an agreement to acquire an energytrading and risk management (“ETRM”) system. Total licensing fees paid to acquire the system, including fees paid toexpand the number of users in June 2007, were $1.0 million.  Total capitalized costs to acquire anddevelop the ETRM system, which are included in fixed assets, were $2.2 millionat both June 30, 2008 and 2007.  TheCompany is required to pay annual maintenance fees of approximately $0.2million for as long as it uses the ETRM system. The Company is currently utilizing the ETRM system and will continue tomake enhancements to the system as necessary in future periods.

 

**Capacity Charge Commitments**

 

TheCompany enters into agreements to transport and store natural gas.  Since the demand for natural gas in thewinter is high, the Company agrees to pay for certain capacity for thetransportation systems utilized for up to a twelve-month period.  These agreements are take-or-pay in that ifthe Company does not use the capacity, it still must pay for capacitycommitted.  For contracts outstanding, asof June 30, 2008, the total committed capacity charges were approximately$3.6 million.  These agreements willexpire during various months in the fiscal year ending June 30, 2009, andwill be replaced with new contracts as necessary.

 

**Physical Commodity Purchase Commitments**

 

TheCompany has forward physical contracts to acquire natural gas and electricityin specified future periods.   Thecontracts to acquire natural gas generally have a fixed basis component and avariable component determined based on market prices at purchase date.  Contracts to acquire electricity generallyare on a fixed basis.  All such contractsare considered normal purchases under U.S. GAAP.

 

Asof June 30, 2008 the Company had forward physical contracts to purchase atotal of 7,092,000 MMBtus of natural gas beginning in July 2008 and endingin December 2009.  The amount of thefixed basis and variable components of these contracts were $1.8 millionand $94.4 million, respectively, at June 30, 2008.

 

Asof June 30, 2008, the Company had forward physical contracts to purchase atotal of 170,000 MWhrs of electricity beginning in July 2008 and ending inMarch 2011.  These contracts, whichare all on a fixed basis, amounted to $14.4 million at June 30, 2008.

 

Asof June 30, 2008, total forward commitments to purchase natural gas andelectricity were $103.3 million for fiscal year 2009, $6.4 million for fiscalyear 2010 and $0.9 million for fiscal year 2011.

 

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**Contingent Consideration Related to the GasKeyAcquisition**

 

Pursuantto the agreement that governs the GasKey Acquisition (refer to Note 4 of theseconsolidated financial statements), contingent consideration is payable to PSEnergy Group, Inc. on a quarterly basis in arrears for volumes consumedand billed under certain customer contracts for a 36-month period subsequent tothe acquisition date.  The payment willbe determined for activity during each three-month period subsequent to the January 2008closing of the GasKey Acquisition, and capitalized as part of customeracquisition costs.   The contingentconsideration payable to PS Energy Group, Inc. for the six months ended June 30,2008 was approximately $0.2 million.

 

**Contingent Consideration Related to the VantageAcquisition**

 

Inconnection with the Vantage Acquisition (refer to Note 4 of these consolidatedfinancial statements), the Company made an escrow deposit of $0.9 million,which Vantage is eligible to receive as additional consideration, subject toactual customer attrition and bad debt experience associated with customeraccounts acquired from Vantage (the “Vantage Contingent Consideration”).  The funds in escrow are included inrestricted cash on the Company’s consolidated balance sheet.  The Vantage Contingent Consideration will beevaluated at the end of each six-month period during the 18-month periodfollowing the May 17, 2007 closing date for the Vantage Acquisition.  As a result of the evaluations conductedduring the fiscal year ended June 30, 2008, approximately $0.5 million ofadditional consideration was payable to Vantage from restricted cash.

 

The Company will also pay toVantage an established percentage of the realized net margin associated with thepurchased contracts for the original contract term up to a maximum of two yearsafter the closing of the Vantage Acquisition. These margin-sharing payments are not expected to be material.

 

**Contingent Consideration Related to the Acquisition ofCastle Power LLC**

 

OnNovember 1, 2005, the Company acquired certain natural gas customercontracts of Castle Power LLC (“Castle”). Pursuant to an ongoing agreement, contingent consideration is payable toCastle on a quarterly basis in arrears for volumes consumed and paid for oncertain customer contracts acquired from Castle.  The payment is determined at the end of eachquarter and capitalized as part of customer acquisition costs.  The contingent consideration payable toCastle for activity during the fiscal year ended June 30, 2008 wasapproximately $0.1 million.

 

**Litigation**

 

Fromtime to time, the Company is a party to claims and legal proceedings that arisein the ordinary course of business, including investigations of product pricingand billing practices by various governmental or other regulatoryagencies.  Management does not believethat any such proceedings to which the Company is currently a party will have amaterial impact on the Company’s results of operations or financial position.

 

TheCompany does not have physical custody or control of any of the natural gasthat is ultimately provided to its customers, and does not have physicalcustody or control over any facilities used to transport natural gas to itscustomers.  Title to the natural gas soldto the Company’s customers is passed at the same point at which the Companyaccepts title from its natural gas suppliers. Therefore, management does not believe that the Company has significantexposure to legal claims or other liabilities associated with environmentalconcerns.

 

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***Note 21. Business Segments***

 

TheCompany’s core business is the retail sale of natural gas and electricity toend-use customers in deregulated markets. Accordingly, the Company’s business is classified into two businesssegments: natural gas and electricity. Through these business units, natural gas and electricity are sold atcontracted prices based on the demand or usage of customers.

 

Priorto the fourth quarter of the fiscal year ended June 30, 2007, the Companyhad reported three business segments: residential and small commercial naturalgas (mass market); mid-market commercial natural gas; and electricity.  Effective in the fourth quarter of fiscal2007, the Company no longer considered the mass market and mid-market naturalgas markets to be separate reportable segments, based on the followingrationale:

 

·                  Managementdoes not evaluate or manage the mid-market commercial natural gas business in amanner distinct from the mass market;

·                  Naturalgas and electricity are each managed as overall portfolios;

·                  Supplyof natural gas is handled consistently for both mass markets and mid-markets;

·                  Inassessing risk for the natural gas business, no separation is made for massmarket and mid-market risk exposures; and

·                  Themid-market commercial natural gas is not a significant component of the overallgas business.

 

Asa result, the Company has revised financial information for the fiscal yearended June 30, 2006 to conform to the presentation for the fiscal yearsended June 30, 2008 and 2007.

 

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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)**   | ** **  |
| **2008:**                                                                          |       |                 |        |            |       |         |       |
| Sales                                                                              | ** ** | **$**                | **669,522** | ** **      | **$**      | **82,761**   | ** ** | **$** | **752,283** | ** ** |
| Cost of goods sold (1)                                                             | ** ** | **(564,219**         | **)**       | **(72,534**     | **)**      | **(636,753** | **)**      |
| Gross profit (1)                                                                   | ** ** | **$**                | **105,303** | ** **      | **$**      | **10,227**   | ** ** | **115,530** | ** ** |
| ** **                                                                         | ** ** | ** **           | ** **  | ** **      | ** ** | ** **   | ** ** |
| Items to reconcile total segment gross profit to income before income  tax expense | ** ** | ** **           | ** **  | ** **      | ** ** | ** **   | ** ** |
| Unrealized gains (losses) from risk management activities                          | ** ** | ** **           | ** **  | ** **      | ** ** | **67,168**   | ** ** |
| Operating expenses                                                                 | ** ** | ** **           | ** **  | ** **      | ** ** | **(106,645** | **)**      |
| Interest expense, net of interest income                                           | ** ** | ** **           | ** **  | ** **      | ** ** | **(34,105**  | **)**      |
| ** **                                                                         | ** ** | ** **           | ** **  | ** **      | ** ** | ** **   | ** ** |
| Income before income tax expense                                                   | ** ** | ** **           | ** **  | ** **      | ** ** | **$**        | **41,948** | ** ** |
| ** **                                                                         | ** ** | ** **           | ** **  | ** **      | ** ** | ** **   | ** ** |
| Assets and liabilities allocated to business segments at period end:               | ** ** | ** **           | ** **  | ** **      | ** ** | ** **   | ** ** |
| Accounts receivable, net                                                           | ** ** | **$**                | **65,897**  | ** **      | **$**      | **21,776**   | ** ** | **$** | **87,673** | ** ** |
| Natural gas inventories                                                            | ** ** | **65,006**           | ** **  | **—**      | ** ** | **65,006**   | ** ** |
| Goodwill                                                                           | ** ** | **3,810**            | ** **  | **—**      | ** ** | **3,810**    | ** ** |
| Customer acquisition costs, net                                                    | ** ** | **34,439**           | ** **  | **7,254**       | ** ** | **41,693**   | ** ** |
| Total Assets                                                                       | ** ** | **$**                | **169,152** | ** **      | **$**      | **29,030**   | ** ** | **$** | **198,182** | ** ** |
|                                                                               | ** ** | ** **           | ** **  | ** **      | ** ** | ** **   | ** ** |
| **2007:**                                                                          |       |                 |        |            |       |         |       |
| Sales                                                                              |       | $                    | 680,811     |            | $          | 23,115       |       | $ | 703,926 |   |
| Cost of goods sold (1)                                                             |       | (565,531             | )           | (19,536         | )          | (585,067     | )          |
| Gross profit (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                          |       |                 |        |            |       | (17,079      | )          |
| Operating expenses                                                                 |       |                 |        |            |       | (91,015      | )          |
| Interest expense, net of interest income                                           |       |                 |        |            |       | (33,058      | )          |
|                                                                               |       |                 |        |            |       |         |       |
| Loss before income tax benefit                                                     |       |                 |        |            |       | $            | (22,293    | ) |
|                                                                               |       |                 |        |            |       |         |       |
| Assets and liabilities allocated to business segments at period end:               |       |                 |        |            |       |         |       |
| Accounts receivable                                                                |       | $                    | 42,069      |            | $          | 6,252        |       | $ | 48,321 |   |
| Natural gas inventories                                                            |       | 56,547               |        | —          |       | 56,547       |       |
| Goodwill                                                                           |       | 3,810                |        | —          |       | 3,810        |       |
| Customer acquisition costs, net                                                    |       | 36,626               |        | 2,328           |       | 38,954       |       |
| Total Assets                                                                       |       | $                    | 139,052     |            | $          | 8,580        |       | $ | 147,632 |   |
|                                                                               |       |                 |        |            |       |         |       |
| **2006:**                                                                          |       |                 |        |            |       |         |       |
| Sales                                                                              |       | $                    | 345,629     |            | $          | 16,932       |       | $ | 362,561 |   |
| Cost of goods sold (1)                                                             |       | (296,607             | )           | (13,022         | )          | (309,629     | )          |
| Gross profit (1)                                                                   |       | $                    | 49,022      |            | $          | 3,910        |       | 52,932 |   |
|                                                                               |       |                 |        |            |       |         |       |
| Items to reconcile total segment gross profit to loss before income  tax benefit:  |       |                 |        |            |       |         |       |
| Unrealized gains (losses) from risk management activities                          |       |                 |        |            |       | (79,897      | )          |
| Operating expenses                                                                 |       |                 |        |            |       | (36,618      | )          |
| Interest expense, net of interest income                                           |       |                 |        |            |       | (3,200       | )          |
|                                                                               |       |                 |        |            |       |         |       |
| Loss before income tax benefit                                                     |       |                 |        |            |       | $            | (66,783    | ) |

 

----

| (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 22.  CondensedConsolidating Financial Information***

 

The Senior Notes were issued by Holdings in August 2006.  Each of the following wholly owned domesticsubsidiaries of Holdings (the “Guarantor Subsidiaries”) jointly, severally andunconditionally guarantees the Senior Notes on a senior unsecured 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 into MXenergy Inc.)                                                |
| · |   | Total Gas & Electricity (PA) Inc.,  d/b/a/ MXenergy Electric (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 Senior Notes (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.  Priorto the three months ended March 31, 2008, the Company’s Senior Notes andrelated interest expense were reported as a liability and expense,respectively, for Holdings in the Company’s consolidating financialstatements.  During the three monthsended March 31, 2008, the Company revised its consolidation methodology toallocate the Senior Notes and the related interest expense to its GuarantorSubsidiaries.  Consolidating financialinformation reflected in the consolidating balance sheets as of June 30,2007 and 2006 and the consolidating statements of operations and cash flows forthe fiscal years ended June 30, 2007 and 2006 has been conformed to the current year’s presentation.

 

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**MXenergy Holdings Inc.**

**Consolidating Balance Sheet**

**June 30, 2008**

**(dollars in 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              |       |
| Due from intercompany                                                |       | 184,200                      |       | —                        |       | —                      |       | (184,200         | )          | —           |       |
| 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                                                 |       | 191,907                      |       | 1,300                         |       | 262,966                     |       | (184,200         | )          | 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                      |       | (10,503          | )          | 10,503           |       |
| Long-term investments                                                |       | 45,820                       |       | —                        |       | —                      |       | (45,820          | )          | —           |       |
| Other assets                                                         |       | 3,134                        |       | —                        |       | 893                         |       |             |       | 4,027            |       |
| Total assets                                                         |       | $                            | 251,598    |                          | $          | 1,368                       |       | $                | 343,309    |             | $          | (240,523 | ) | $ | 355,752 |   |
|                                                                 |       |                         |       |                          |       |                        |       |             |       |             |       |
| **Liabilities and stockholders’ equity**                        |       |                         |       |                          |       |                        |       |             |       |             |       |
| Current liabilities:                                                 |       |                         |       |                          |       |                        |       |             |       |             |       |
| Accounts payable and accrued liabilities                             |       | $                            | 8,816      |                          | $          | 306                         |       | $                | 27,480     |             | $          | — |   | $ | 36,602 |   |
| Accrued commodity purchases                                          |       | —                       |       | 612                           |       | 50,849                      |       |             |       | 51,461           |       |
| Due to intercompany                                                  |       | —                       |       | 1,912                         |       | 185,590                     |       | (187,502         | )          | —           |       |
| 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                       |       | (9,800           | )          | 9,800            |       |
| Total current liabilities                                            |       | 20,803                       |       | 2,830                         |       | 281,945                     |       | (197,302         | )          | 108,276          |       |
| Unrealized losses from risk management activities                    |       | 2,839                        |       | —                        |       | —                      |       |             |       | 2,839            |       |
| Long-term debt:                                                      |       |                         |       |                          |       |                        |       |             |       |             |       |
| Floating Rate Senior Note Due 2011                                   |       | 162,648                      |       | —                        |       | —                      |       |             |       | 162,648          |       |
| Total long term debt                                                 |       | 162,648                      |       | —                        |       | —                      |       | —           |       | 162,648          |       |
| Total liabilities                                                    |       | 186,290                      |       | 2,830                         |       | 281,945                     |       | (197,302         | )          | 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                                                  |       | 819                          |       | —                        |       | 42,401                      |       | (43,220          | )          | —           |       |
| Unearned stock compensation                                          |       | (4                           | )          | —                        |       | —                      |       |             |       | (4               | )          |
| Accumulated other comprehensive loss                                 |       |                         |       | (189                          | )          | —                      |       |             |       | (189             | )          |
| Retained earnings                                                    |       | (7,957                       | )          | (1,274                        | )          | 18,963                      |       |             |       | 9,732            |       |
| Total stockholders’ equity                                      |       | 16,529                       |       | (1,462                        | )          | 61,364                      |       | (43,221          | )          | 33,210           |       |
| Total liabilities and stockholders’ equity                      |       | $                            | 251,598    |                          | $          | 1,368                       |       | $                | 343,309    |             | $          | (240,523 | ) | $ | 355,752 |   |

 

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**MXenergy Holdings Inc.**

**Consolidating Balance Sheet**

**June 30, 2007**

**(dollars in thousands)**

 
| ** **                                                           | ** ** | **MXenergy**           | ** ** | **Non-guarantor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                           | ** ** | **Holdings Inc.** | ** ** | **Subsidiary**    | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                           |       |                   |       |              |       |             | ** ** | ** **       |       |             |       |
| Current assets:                                                      |       |                   |       |              |       |             |       |             |       |             |       |
| Cash and cash equivalents                                            |       | $                      | —     |              | $          | 138              |       | $                | 136,804    |             | $          | — |   | $ | 136,942 |   |
| Restricted cash                                                      |       | —                 |       | —            |       | 1,050            |       |             |       | 1,050            |       |
| Due from intercompany                                                |       | 174,655                |       | —            |       | —           |       | (174,655         | )          | —           |       |
| Accounts receivable, net                                             |       | —                 |       | 121               |       | 48,200           |       |             |       | 48,321           |       |
| Natural gas inventories                                              |       | —                 |       | —            |       | 56,547           |       |             |       | 56,547           |       |
| Current portion of unrealized gains from risk management activities  |       | —                 |       | —            |       | 50               |       |             |       | 50               |       |
| Income taxes receivable                                              |       | 351                    |       | —            |       | —           |       |             |       | 351              |       |
| Deferred income taxes                                                |       | 9,136                  |       | —            |       | 9,136            |       | (9,136           | )          | 9,136            |       |
| Other current assets                                                 |       | —                 |       | 152               |       | 5,159            |       |             |       | 5,311            |       |
| Total current assets                                                 |       | 184,142                |       | 411               |       | 256,946          |       | (183,791         | )          | 257,708          |       |
| Goodwill                                                             |       | —                 |       | —            |       | 3,810            |       |             |       | 3,810            |       |
| Customer acquisition costs, net                                      |       | —                 |       | 73                |       | 38,881           |       |             |       | 38,954           |       |
| Fixed assets, net                                                    |       | —                 |       | —            |       | 17,849           |       |             |       | 17,849           |       |
| Deferred income taxes                                                |       | 9,754                  |       | —            |       | 9,754            |       | (9,754           | )          | 9,754            |       |
| Long-term investments                                                |       | 43,112                 |       | —            |       | —           |       | (43,112          | )          | —           |       |
| Other assets                                                         |       | 4,477                  |       | —            |       | 3,092            |       |             |       | 7,569            |       |
| Total assets                                                         |       | $                      | 241,485    |              | $          | 484              |       | $                | 330,332    |             | $          | (236,657 | ) | $ | 335,644 |   |
|                                                                 |       |                   |       |              |       |             |       |             |       |             |       |
| **Liabilities and stockholders’ equity**                        |       |                   |       |              |       |             |       |             |       |             |       |
| Current liabilities:                                                 |       |                   |       |              |       |             |       |             |       |             |       |
| Accounts payable and accrued liabilities                             |       | $                      | 9,846      |              | $          | 163              |       | $                | 21,519     |             | $          | — |   | $ | 31,528 |   |
| Accrued commodity purchases                                          |       | —                 |       | 105               |       | 31,192           |       |             |       | 31,297           |       |
| Due to intercompany                                                  |       | —                 |       | 1,581             |       | 186,703          |       | (188,284         | )          | —           |       |
| Current Portion of unrealized losses from risk management activities |       | 544                    |       | —            |       | 16,530           |       |             |       | 17,074           |       |
| Deferred Revenue                                                     |       | —                 |       | —            |       | 11,787           |       |             |       | 11,787           |       |
| Total current liabilities                                            |       | 10,390                 |       | 1,849             |       | 267,731          |       | (188,284         | )          | 91,686           |       |
| Unrealized losses from risk management activities                    |       | 775                    |       | —            |       | 2,811            |       |             |       | 3,586            |       |
| Long-term debt:                                                      |       |                   |       |              |       |             |       |             |       |             |       |
| Floating Rate Senior Note due 2011                                   |       | 174,404                |       | —            |       | (40              | )          |             |       | 174,364          |       |
| Denham Credit Facility                                               |       | —                 |       | —            |       | 11,040           |       |             |       | 11,040           |       |
| Total long term debt                                                 |       | 174,404                |       | —            |       | 11,000           |       | —           |       | 185,404          |       |
| Total liabilities                                                    |       | 185,569                |       | 1,849             |       | 281,542          |       | (188,284         | )          | 280,676          |       |
| Redeemable Convertible Preferred Stock                               |       | 29,357                 |       | —            |       | —           |       |             |       | 29,357           |       |
| Commitments and Contingencies                                        |       | —                 |       | —            |       | —           |       | —           |       | —           |       |
|                                                                 |       |                   |       |              |       |             |       |             |       |             |       |
| Stockholders’ Equity (Deficit)                                  |       |                   |       |              |       |             |       |             |       |             |       |
| Common stock                                                         |       | 34                     |       | 1                 |       | —           |       | (1               | )          | 34               |       |
| Additional paid-in-capital                                           |       | 21,367                 |       | —            |       | —           |       |             |       | 21,367           |       |
| Contributed capital                                                  |       | 819                    |       | —            |       | 42,401           |       | (43,220          | )          | —           |       |
| Unearned stock compensation                                          |       | (22                    | )          | —            |       | —           |       |             |       | (22              | )          |
| Accumulated other comprehensive loss                                 |       | —                 |       | (129              | )          | —           |       |             |       | (129             | )          |
| Retained earnings (deficit)                                          |       | 4,361                  |       | (1,237            | )          | 6,389            |       | (5,152           | )          | 4,361            |       |
| Total stockholders’ equity (deficit)                            |       | 26,559                 |       | (1,365            | )          | 48,790           |       | (48,373          | )          | 25,611           |       |
|                                                                 |       |                   |       |              |       |             |       |             |       |             |       |
| Total liabilities and stockholders’ equity (deficit)            |       | $                      | 241,485    |              | $          | 484              |       | $                | 330,332    |             | $          | (236,657 | ) | $ | 335,644 |   |

 

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**MXenergy Holdings Inc.**

**Consolidating Statement of Operations**

**Year Ended June 30, 2008**

**(dollars in thousands)**

 
| ** **                                                    | ** ** | **MXenergy**           | ** ** | **Non-guarantor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Holdings Inc.** | ** ** | **Subsidiary**    | ** ** | **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 (expense) benefit                                  |       | (17,155                | )          |              |       | (17,771          | )          | 17,771           |       | (17,155          | )          |
| Net income (loss)                                             |       | $                      | 7,022      |              | $          | (36              | )          | $                | 27,620     |             | $          | (9,813 | ) | $ | 24,793 |   |

 

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**MXenergy Holdings Inc.**

**Consolidating Statement of Operations**

**Year Ended June 30, 2007**

**(dollars in thousands)**

 
| ** **                                                    | ** ** | **MXenergy**           | ** ** | **Non-guarantor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Holdings Inc.** | ** ** | **Subsidiary**    | ** ** | **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                                  |       | 8,495                  |       |              |       | 10,111           |       | (10,111          | )          | 8,495            |       |
| Net (loss) income                                             |       | $                      | (3,687     | )                 | $          | (409             | )          | $                | (14,917    | )                | $          | 5,214 |   | $ | (13,798 | ) |

 

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**MXenergy Holdings Inc.**

**Consolidating Statement of Operations**

**Year Ended June 30, 2006**

**(dollars in thousands)**

 
| ** **                                                   | ** ** | **MXenergy**       | ** ** | **Non-**                  | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|---------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                   | ** ** | **Holdings  Inc.** | ** ** | **guarantor  Subsidiary** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                         |       |               |       |                      |       |                        |       |             |       |             |       |
| Sales of natural gas and electricity                         |       | $                  | —     |                      | $          | 1,271                       |       | $                | 361,290    |             | $          | — |   | $ | 362,561 |   |
| Cost of goods sold (excluding depreciation and amortization) |       |               |       |                      |       |                        |       |             |       |             |       |
| Cost of natural gas and electricity sold                     |       | —             |       | 1,697                     |       | 390,915                     |       |             |       | 392,612          |       |
| Realized losses from risk management activities              |       | —             |       | —                    |       | (82,983                     | )          |             |       | (82,983          | )          |
| Unrealized losses from risk management activities            |       | —             |       | —                    |       | 79,897                      |       |             |       | 79,897           |       |
|                                                         |       | —             |       | 1,697                     |       | 387,829                     |       | —           |       | 389,526          |       |
| Gross loss                                                   |       | —             |       | (426                      | )          | (26,539                     | )          | —           |       | (26,965          | )          |
|                                                         |       |               |       |                      |       |                        |       |             |       |             |       |
| Operating expenses:                                          |       |               |       |                      |       |                        |       |             |       |             |       |
| General and administrative expenses                          |       | 911                |       | 107                       |       | 21,605                      |       |             |       | 22,623           |       |
| Advertising and marketing expenses                           |       | —             |       | 1                         |       | 2,095                       |       |             |       | 2,096            |       |
| Reserves and discounts                                       |       | —             |       | —                    |       | 3,395                       |       |             |       | 3,395            |       |
| Depreciation and amortization                                |       | —             |       | 107                       |       | 8,397                       |       |             |       | 8,504            |       |
| Equity in operations of consolidated subsidiaries            |       | 38,686             |       | —                    |       | —                      |       | (38,686          | )          | —           |       |
| Total operating expenses                                     |       | 39,597             |       | 215                       |       | 35,492                      |       | (38,686          | )          | 36,618           |       |
|                                                         |       |               |       |                      |       |                        |       |             |       |             |       |
| Operating (loss) profit                                      |       | (39,597            | )          | (641                      | )          | (62,031                     | )          | 38,686           |       | (63,583          | )          |
| Interest expense, net                                        |       | 641                |       | —                    |       | 2,559                       |       | —           |       | 3,200            |       |
| (Loss) income before income tax benefit (expense)            |       | (40,238            | )          | (641                      | )          | (64,590                     |       | 38,686           |       | (66,783          | )          |
| Income tax benefit (expense)                                 |       | 27,001             |       | 192                       |       | 26,353                      |       | (26,545          | )          | 27,001           |       |
| Net (loss) income                                            |       | $                  | (13,237    | )                         | $          | (449                        | )          | $                | (38,237    | )                | $          | 12,141 |   | $ | (39,782 | ) |

 

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**MXenergy Holdings Inc.**

**Consolidating Statement of Cash Flows**

**Year Ended June 30, 2008**

**(dollars in thousands)**

 
| ** **                                                                                          | ** ** | **MXenergy**           | ** ** | **Non-guarantor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                          | ** ** | **Holdings Inc.** | ** ** | **Subsidiary**    | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating activities:**                                                                           |       |                   |       |              |       |             |       |             |       |             |       |
| Net income (loss)                                                                                   |       | $                      | 7,022      |              | $          | (36              | )          | $                | 27,620     |             | $          | (9,813 | ) | $ | 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           |       | (18,187          | )          | 18,187           |       |
| 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                                                                                 |       | (1,787                 | )          | 93                |       | (30,274          | )          | 1,787            |       | (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                                                                                        |       | 1,344                  |       | (194              | )          | (541             | )          |             |       | 609              |       |
| Accounts payable, accrued commodity purchases and accrued liabilities                               |       | 758                    |       | 981               |       | (3,718           | )          | 19,861           |       | 17,882           |       |
| Deferred revenue                                                                                    |       | —                 |       | —            |       | (4,352           | )          |             |       | (4,352           | )          |
| Net cash (used in) provided by operating activities                                                 |       | (5,943                 | )          | 880               |       | (31,923          | )          | 28,405           |       | (8,581           | )          |
|                                                                                                |       |                   |       |              |       |             |       |             |       |             |       |
| **Investing activities:**                                                                           |       |                   |       |              |       |             |       |             |       |             |       |
| Long-term investments                                                                               |       | 28,405                 |       | —            |       | —           |       | (28,405          | )          | —           |       |
| Loan to PS Energy Group Inc. related to purchase of GasKey assets                                   |       | —                 |       | —            |       | (8,983           | )          |             |       | (8,983           | )          |
| Cash received from to 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 (used in) provided by investing activities                                                 |       | 28,405                 |       | (47               | )          | (33,894          | )          | (28,405          | )          | (33,941          | )          |
|                                                                                                |       |                   |       |              |       |             |       |             |       |             |       |
| **Financing activities:**                                                                           |       |                   |       |              |       |             |       |             |       |             |       |
| Repayment of Denham Credit facility                                                                 |       | (11,040                | )          | —            |       | —           |       |             |       | (11,040          | )          |
| Repurchase of senior notes                                                                          |       | (12,006                | )          | —            |       | —           |       |             |       | (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                                                               |       | (22,462                | )          | —            |       | —           |       | —           |       | (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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**MXenergy Holdings Inc.**

**Consolidating Statement of Cash Flows**

**Year Ended June 30, 2007**

**(dollars in thousands)**

 
| ** **                                                                                 | ** ** | **MXenergy**           | ** ** | **Non-guarantor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                 | ** ** | **Holdings Inc.** | ** ** | **Subsidiary**    | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                 |       |                   |       |              |       |             |       |             |       |             |       |
| **Operating activities:**                                                                  |       |                   |       |              |       |             |       |             |       |             |       |
| Net income (loss)                                                                          |       | $                      | (3,687     | )                 | $          | (409             | )          | $                | (14,917    | )                | $          | 5,214 |   | $ | (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          | )          | 14,449           |       | (14,449          | )          |
| Unrealized losses on interest rate swaps and amortization of deferred  financing fees      |       | 1,187                  |       | —            |       | 6,719            |       |             |       | 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                                                                   |       | (199,765               | )          | (147              | )          | 3,600            |       | 199,765          |       | 3,453            |       |
| Natural gas inventories                                                                    |       | —                 |       | —            |       | (1,712           | )          |             |       | (1,712           | )          |
| Income taxes receivable                                                                    |       | 5,184                  |       | —            |       | —           |       |             |       | 5,184            |       |
| Option premiums                                                                            |       | —                 |       | —            |       | 1,835            |       |             |       | 1,835            |       |
| Other assets                                                                               |       |                   |       | (69               | )          | (924             | )          |             |       | (993             | )          |
| Accounts payable, accrued commodity purchases and accrued liabilities                      |       | 9,846                  |       | 620               |       | 84,349           |       | (63,260          | )          | 31,555           |       |
| Deferred revenue                                                                           |       | —                 |       | —            |       | 9,384            |       |             |       | 9,384            |       |
| Net cash (used in) provided by operating activities                                        |       | (186,358               | )          | 86                |       | 134,410          |       | 140,842          |       | 88,981           |       |
|                                                                                       |       |                   |       |              |       |             |       |             |       |             |       |
| **Investing activities:**                                                                  |       |                   |       |              |       |             |       |             |       |             |       |
| Long-term investments                                                                      |       | 140,842                |       | —            |       | —           |       | (140,842         | )          | —           |       |
| 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                                                      |       | 17,414                 |       | (95               | )          | (9,397           | )          | (140,842         | )          | (132,920         | )          |
|                                                                                       |       |                   |       |              |       |             |       |             |       |             |       |
| **Financing activities:**                                                                  |       |                   |       |              |       |             |       |             |       |             |       |
| Proceeds from loans                                                                        |       | —                 |       | —            |       | 6,000            |       |             |       | 6,000            |       |
| Repayments of loans                                                                        |       | —                 |       | —            |       | (6,000           | )          |             |       | (6,000           | )          |
| Debt financing costs                                                                       |       | (4,149                 | )          | —            |       | (5,196           | )          |             |       | (9,345           | )          |
| Proceeds from Denham Credit Facility                                                       |       | —                 |       | —            |       | 23,040           |       |             |       | 23,040           |       |
| Repayment of Denham Credit Facility                                                        |       | —                 |       | —            |       | (12,000          | )          |             |       | (12,000          | )          |
| Proceeds from bridge loan                                                                  |       | 190,000                |       | —            |       | —           |       |             |       | 190,000          |       |
| Repayment of bridge loan                                                                   |       | (190,000               | )          | —            |       | —           |       |             |       | (190,000         | )          |
| Proceeds from Senior Notes                                                                 |       | 185,250                |       | —            |       | —           |       |             |       | 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                                                  |       | 168,944                |       | —            |       | 5,844            |       | —           |       | 174,788          |       |
| Net (decrease) increase in cash and cash equivalents                                       |       | —                 |       | (9                | )          | 130,857          |       | —           |       | 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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**MXenergy Holdings Inc.**

**Consolidating Statement of Cash Flows**

**Year Ended June 30, 2006**

**(dollars in thousands)**

 
| ** **                                                                                          | ** ** | **MXenergy**           | ** ** | **Non-Guarantor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                          | ** ** | **Holdings Inc.** | ** ** | **Subsidiary**    | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating activities:**                                                                           |       |                   |       |              |       |             |       |             |       |             |       |
| Net income (loss)                                                                                   |       | $                      | (13,237    | )                 | $          | (449             | )          | $                | (38,238    | )                | $          | 12,142 |   | $ | (39,782 | ) |
| Adjustments to reconcile net (loss) income to net cash (used in)  provided by operating activities: |       |                   |       |              |       |             |       |             |       |             |       |
| Unrealized losses from risk management activities                                                   |       | —                 |       | —            |       | 79,897           |       |             |       | 79,897           |       |
| Stock compensation expense                                                                          |       | 911                    |       | —            |       | —           |       |             |       | 911              |       |
| Depreciation and amortization                                                                       |       | —                 |       | 107               |       | 8,397            |       |             |       | 8,504            |       |
| Deferred income tax benefit                                                                         |       | (32,764                | )          | —            |       | (32,764          | )          | 32,764           |       | (32,764          | )          |
| Unrealized losses on interest rate swaps and amortization of deferred  financing fees               |       | 641                    |       | —            |       | 416              |       |             |       | 1,057            |       |
| Amortization of customer contracts acquired                                                         |       | —                 |       | —            |       | (3,276           | )          |             |       | (3,276           | )          |
| Equity in operations of consolidated subsidiaries                                                   |       | 38,686                 |       | —            |       | —           |       | (38,686          | )          | —           |       |
| Changes in assets and liabilities, net of effects of acquisition:                                   |       |                   |       |              |       |             |       |             |       |             |       |
| Restricted cash                                                                                     |       | —                 |       | —            |       | 6,953            |       |             |       | 6,953            |       |
| Accounts receivable, net                                                                            |       | —                 |       | 88                |       | (13,091          | )          |             |       | (13,003          | )          |
| Natural gas inventories                                                                             |       | —                 |       | —            |       | (2,685           | )          |             |       | (2,685           | )          |
| Income taxes receivable                                                                             |       | (5,535                 | )          | —            |       | —           |       |             |       | (5,535           | )          |
| Option premiums                                                                                     |       | —                 |       | —            |       | (1,834           | )          |             |       | (1,834           | )          |
| Other assets                                                                                        |       | (505                   | )          | (72               | )          | 3,222            |       |             |       | 2,645            |       |
| Accounts payable, accrued commodity purchases and accrued liabilities                               |       | (27,675                |  )    | 176               |       | (42,922          |  )    | 65,101           |       | (5,320           |  )    |
| Deferred Revenue                                                                                    |       | —                 |       | —            |       | 865              |       |             |       | 865              |       |
| Net cash (used in) provided by operating activities                                                 |       | (39,478                | )          | (150              | )          | (35,060          | )          | 71,321           |       | (3,367           | )          |
|                                                                                                |       |                   |       |              |       |             |       |             |       |             |       |
| **Investing activities:**                                                                           |       |                   |       |              |       |             |       |             |       |             |       |
| Long-term investments                                                                               |       | 71,321                 |       | —            |       | —           |       | (71,321          | )          | —           |       |
| Deposit and capitalized costs related to purchase of SESCo assets                                   |       | (3,348                 | )          | —            |       | —           |       |             |       | (3,348           | )          |
| Purchase of Castle customer portfolio                                                               |       | (3,150                 | )          | —            |       | —           |       |             |       | (3,150           | )          |
| Customer acquisition costs                                                                          |       | —                 |       | —            |       | (6,149           | )          |             |       | (6,149           | )          |
| Purchases of fixed assets                                                                           |       | —                 |       | —            |       | (6,178           | )          |             |       | (6,178           | )          |
| Net cash provided by (used in) investing activities                                                 |       | 64,823                 |       | —            |       | (12,327          | )          | (71,321          | )          | (18,825          | )          |
|                                                                                                |       |                   |       |              |       |             |       |             |       |             |       |
| **Financing activities:**                                                                           |       |                   |       |              |       |             |       |             |       | —           |       |
| Proceeds from loans                                                                                 |       | 210,123                |       | —            |       | —           |       |             |       | 210,123          |       |
| Repayments of loans                                                                                 |       | (226,502               | )          | —            |       | —           |       |             |       | (226,502         | )          |
| Debt Financing costs                                                                                |       | (2,347                 | )          | —            |       | —           |       |             |       | (2,347           | )          |
| Repayments of long term borrowings                                                                  |       | (5,000                 | )          | —            |       | —           |       |             |       | (5,000           | )          |
| Issuance of common stock and exercise of warrants                                                   |       | 532                    |       | —            |       | —           |       |             |       | 532              |       |
| Purchase and cancellation of treasury shares, net of tax benefit                                    |       | (2,151                 | )          | —            |       | —           |       |             |       | (2,151           | )          |
| Net cash used in by financing activities                                                            |       | (25,345                | )          | —            |       | —           |       | —           |       | (25,345          | )          |
| Net decrease in cash                                                                                |       | —                 |       | (150              | )          | (47,387          | )          | —           |       | (47,537          | )          |
| Cash and cash equivalents at beginning of year                                                      |       | —                 |       | 296               |       | 53,334           |       |             |       | 53,630           |       |
| Cash and cash equivalents at end of year                                                            |       | $                      | —     |              | $          | 146              |       | $                | 5,947      |             | $          | — |   | $ | 6,093 |   |

 

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**ITEM 9.  CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A(T).  CONTROLS AND PROCEDURES**

 

Wemaintain a system of internal and disclosure controls and procedures designedto ensure that information required to be disclosed in reports filed orsubmitted under the Securities and Exchange Act of 1934, as amended (the “ExchangeAct”), is recorded, processed, summarized and reported on a timely basis. OurBoard of Directors, operating through its Audit Committee, provides oversightto the financial reporting process.

 

Anevaluation was conducted, with the participation of the Chief Executive Officerand Chief Financial Officer, of the effectiveness of our disclosure controlsand procedures as of the end of the period covered by this Annual Report Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this Annual Report so as to alert them in a timelyfashion to material information required to be disclosed in our reports filedpursuant to the Exchange Act.

 

Therewere no changes in our internal controls over financial reporting during thefourth quarter of our fiscal year ended June 30, 2008.

 

Section 404of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires management toreport on, and external auditors to attest to, the effectiveness of ourinternal control structure and procedures for financial reporting.  As a non-accelerated filer under Rule 12b-2of the Exchange Act, the first report of our management under Section 404is included in this Annual Report. Management’s report on internal control over financial reporting isincluded on the following page of this Annual Report.

 

ThisAnnual Report does not include an attestation report of our registered publicaccounting firm regarding internal control over financial reporting.  Management’s report was not subject toattestation by our registered public accounting firm pursuant to temporary rules ofthe SEC that permit us to provide only management’s report in this AnnualReport.

 

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**Report of Management on Internal Control overFinancial Reporting**

 

October 14,2008

 

Managementis responsible for establishing and maintaining an adequate internal controlstructure and procedures over financial reporting as defined in Rule 13a-15fof the Securities 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, 2008.  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.

 

Basedon the assessment performed, management concluded that, as of June 30,2008, the Company’s internal control over financial reporting was 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**

 

On June 9, 2008, Holdings entered into theFirst Amendment to Third Amended and Restated Stockholders’ Agreement (The “Stockholders’Agreement Amendment”) with Charter MX LLC, Denham Commodity Partners Fund L.P.and other stockholders holding a majority of the outstanding shares of ourvoting stock.  Pursuant to theStockholders’ Agreement Amendment, transfers of stock for no consideration tocertain not-for-profit entities were added as transfers permitted by the ThirdAmended and Restated Stockholder’s Agreement. The Stockholders’ Agreement Amendment is included in as Exhibit 10.23of this Annual Report.

 

On September 30, 2008, MXenergy Inc. into theFifth Amendment to Master Transaction Agreement with Holdings and certain ofits subsidiaries, as guarantors, and Société Générale, as hedge provider.  This amendment revised the termination dateof the Company’s Hedge Agreement to be the earlier of: (a) 30 days prior to thematurity date of the Revolving Credit Agreement; of (b) July 1, 2009. The FifthAmendment to Master Transaction Agreement is included as Exhibit 10.21 of thisAnnual Report.

 

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**PART III.**

 

**ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE**

 

**Executive Officers and Directors**

 

OurBoard of Directors consists of eight members. Refer to “Item 13.  CertainRelationships and Related Transactions, and Director Independence” forcommentary regarding director independence. All of our executive officers serve at the discretion of our Board ofDirectors, subject to their employment agreements described under “Item11.  Executive Compensation.”

 

Thenames and positions of our current executive officers and directors arepresented in the following table. Descriptions of the business experience of our executive officers anddirectors follow the table.

 
| **Name**                                   | ** ** | **Age** | ** ** | **Position**                                                          |
|--------------------------------------------|------------|---------|------------|-----------------------------------------------------------------------|
|                                       |       |    |       |                                                                  |
| Jeffrey  A. Mayer                          |       | 56      |       | President,  Chief Executive Officer and Director                      |
| Steven  Murray                             |       | 48      |       | Chief  Operating Officer and Director                                 |
| Carole  R. (“Robi”) Artman-Hodge |       | 57      |       | Executive  Vice President and Director                                |
| Chaitu  Parikh                             |       | 39      |       | Vice  President and Chief Financial Officer                           |
| Robert  Blake                              |       | 52      |       | Vice  President, Electricity Operations & Regulatory Affairs |
| Gina  Goldberg                             |       | 50      |       | Vice  President, Marketing                                            |
| Robert  Werner                             |       | 52      |       | Vice  President, Supply                                               |
| Daniel  Bergstein                          |       | 65      |       | Director                                                              |
| Michael  J. Hamilton                       |       | 61      |       | Director                                                              |
| William  Landuyt                           |       | 52      |       | Director                                                              |
| Stuart  Porter                             |       | 42      |       | Director                                                              |
| John  Stewart                              |       | 66      |       | Director                                                              |

 

**Jeffrey A. Mayer** is a co-founder of the Company and has been its President and ChiefExecutive Officer since 1999.  He hasserved as a director of Holdings since 2005. From 1992 to 1999, Mr. Mayerworked for Sempra Trading Corporation, a subsidiary of Sempra Energy (prior to1997, known as AIG Trading Corporation, a subsidiary of AIG), and served as itsManaging Director in charge of natural gas derivatives marketing.  While at Sempra, he worked on the launch of aretail energy marketing joint venture. Prior to joining AIG, Mr. Mayer worked at Goldman, Sachs &Co. where he managed the Energy Futures Department from 1989 to 1992, worked inthe Futures Services Department from 1987 to 1989 and served as Chief Counselof its J. Aron Commodities Division from 1984 to 1987.  Mr. Mayer developed the Energy TradersInstitute, a seminar on risk management sponsored by Infocast and heard bydozens of utilities and energy producers in North America.  Mr. Mayer has provided consultingservices to Northeast Utilities and the Chicago Board of Trade ClearingCorporation.  Mr. Mayer serves asChairman of the Board of Finance of Westport, CT, an elected office in which heserves as chairman of the town’s municipal pension plans, reviews budgets andvotes 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.

 

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**Steven Murray** has been Chief Operating Officer of the Company since August 2006  and has served as a director of Holdingssince 2006.  Previously, Mr. Murrayhad a 25-year career with the Royal Dutch Shell group of companies, where hemost recently served as Chief Executive Officer of SESCo from 2001 to August 2006and as First President and Chief Executive Officer of Shell Trading US Co. from1998 to 2001.  He served as GeneralManager of Higher Olefins and Derivatives Businesses of Shell Chemical LP sinceDecember 2005, where he oversaw marketing activity in over 50 countries,operations for plants located in the United States, the United Kingdom, NewZealand and South Africa, as well as research and development activities inNorth America and The Netherlands.  Mr. Murrayhas previously served as Vice Chairman of the National Energy MarketersAssociation as well as a member of the board of the Soapers and DetergentsAssociation.

 

**Carole R. (“Robi”) Artman-Hodge** has been Executive Vice President of theCompany since 1999 and served as Chief Operating Officer from 1999 to August 2006.  She has served as a director of****Holdings since 2005. Prior to co-foundingthe Company, Ms. Artman-Hodge worked as senior managing director of theProject Finance unit of Bank of Ireland from 1997 to 1998, senior managingdirector of Risk Management and Origination for the Natural Resources unit ofING from 1989 to 1996, senior managing director of the Commodity Finance andTreasury Marketing unit of Banque Paribas from 1981 to 1989 and AssistantTreasurer of the international banking unit of Harris Bank from 1977 to 1981.

 

**Chaitu Parikh** has been Chief Financial Officer and Vice President of Finance of theCompany since July 2004 and serves as its Principal Accounting Officer andAssistant Treasurer.  Mr. Parikhserved as Vice President of Finance 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.

 

**Robert Blake** has been Vice President of Electricity Operations &Regulatory Affairs of the Company since June 2004.  Mr. Blake served as Vice President ofCustomer Operations for the Company from April 2001 to May 2004.  Prior to joining the Company, Mr. Blakeserved as Manager of United Energy from January 2000 to March 2001,and served as Regional Sales Director for Conectiv Energy from April 1998to January 2000.  From 1980 to March 1998,Mr. Blake worked for United Illuminating, an electric utility inConnecticut, where he served as Director of Commercial & IndustrialEnergy Services.  He has been involvedwith numerous national and regional electricity and energy committees and hasheld leadership positions with several regional energy groups, includingchairing a NEPOOL task force.

 

**Gina Goldberg**has served as Vice President of Sales and Marketing of the Companysince February 2004.  Prior tojoining the Company as a consultant in November 2003, Ms. Goldbergheld various marketing positions at Showtime Networks Inc. from 1984 to 2003,including the position of Senior Vice President of Marketing from 1998 to2003.  Ms. Goldberg also served as amember of the Viacom Inc. Marketing Board Council from 1998 to 2003.  Previously, Ms. Goldberg worked in theMarketing Department of The Dallas Morning News from 1981 to 1984.

 

**Robert Werner** has been Vice 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.

 

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**Daniel Bergstein**currently serves as a director of Holdings and****has served as a director of the Companysince 2000.  Mr. Bergstein currentlyserves as Chairman of the Compensation Committee, and also serves as a memberof the Audit and Nominating and Governance Committees.  Since 1988, Mr. Bergstein has been asenior partner in the New York office of the international law firm Paul,Hastings, Janofsky & Walker LLP, where he is the Chairman of the firm’sglobal Telecommunications and Media practice. Mr. Bergstein is also a co-founder of Cequel III LLC and a directorof Cequel Communications, LLC, the 8th largest cable company in the UnitedStates.  He is also an advisory boardmember of Catalyst Investors I and II, L.P., two private equity investment fundsspecializing in telecom and media investments, a board member of SR.Teleperformance, S.A., a Paris stock exchange listed company, and a trustee andboard member of The Foundation Fighting Blindness.

 

**Michael J. Hamilton**was elected as a director of Holdings on March 27, 2008, andcurrently serves as the Chairman of the Audit Committee and as a member of theRisk Oversight Committee.  Mr. Hamiltoncurrently is Chairman and Chief Executive Officer of MMC Energy, Inc. apublicly traded merchant electricity generator that owns several generatingunits in California.  Prior to hiscurrent experience, Mr. Hamilton was the partner in charge of utilityaudit and 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,primarily in the merchant power industry. Mr. Hamilton is a certified public accountant with an additionalcertification in business valuation and is a certified turnaround professional.

 

**William Landuyt**currently serves as a director of Holdings and****has served as a director of the Companysince 2004.  Mr. Landuyt currentlyserves as a member of the Audit, Compensation and Nominating and GovernanceCommittees.  Mr. Landuyt is a seniorpartner at Charterhouse Group, Inc., a position he has held since December 2003.  From October 1996 until 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 until October 1996.  Mr. Landuyt held the positions ofFinance Director of Hanson Plc from 1992 until May 1995 and Director ofHanson Plc from 1992 until October 1996. Mr. Landuyt served as Vice President and Chief Financial Officer ofHanson Industries from 1988 to 1992.

 

**Stuart Porter**currently serves as a director of Holdings and****has served as a director of the Companysince 2000.   Mr. Porter currentlyserves as Chairman of the Risk Oversight and Nominating and GovernanceCommittees, and serves as a member of the Compensation Committee.  Since June 2007, Mr. Porter hasbeen a principal of Denham Capital Management LP, and serves as ChiefInvestment Officer for the Denham Commodity Partners Funds.  From 2004 until 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.

 

**John Stewart**currently serves as a director of Holdings and****has served as a director of the Companysince 2000.  Mr. Stewart has been anattorney in private practice since 1981. Mr. Stewart serves on the board of directors of P&B Woodworkingand the Amity Art Foundation.  Inaddition, Mr. Stewart serves as the chairman of the Library Commission ofWoodbridge, Connecticut.

 

**Committees of the Board of Directors**

 

OurBoard of Directors has appointed four committees to help carry out its duties:the Audit Committee, the Compensation Committee, the Risk Oversight Committeeand the Nominating and Governance Committee.

 

TheAudit Committee consists of Mr. Michael J. Hamilton****(Chair) and Messrs. Daniel Bergsteinand William Landuyt.  The Board ofDirectors has determined that Messrs. Hamilton and Landuyt qualify asAudit Committee financial experts within the meaning of the SEC rules.  The Audit Committee makes recommendations tothe Board of Directors regarding the selection of independent accountants,reviews the results and scope of audit and other services provided by ourindependent accountants and reviews and evaluates our internal audit andcontrol functions.

 

TheCompensation Committee consists of Mr. Daniel Bergstein (Chair) and Messrs. WilliamLanduyt and Stuart Porter. The Compensation Committee administers our employeestock and other benefit plans and makes decisions concerning salaries andincentive compensation for our employees.

 

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TheRisk Oversight Committee consists of Mr. Stuart Porter (Chair), Mr. MichaelJ. Hamilton, Ms. Carole R. Artman-Hodge and Messrs. Jeffrey Mayer,Steven Murray and Chaitu Parikh.  TheRisk Oversight Committee establishes and oversees the Company’s risk managementpolicies.

 

TheNominating and Governance Committee consists of Mr. Stuart Porter (Chair)and Messrs. Daniel Bergstein and William Landuyt.  The Nominating and Governance Committeeidentifies and recommends qualified individuals to serve as board and committeemembers, monitors the effectiveness of the Board of Directors and itscommittees and establishes the corporate governance guidelines for the Company.

 

**Code of Ethics**

 

Wehave adopted a Code of Business Conduct and Ethics (the “Code of Ethics”),which applies to our directors, officers and employees that meets thedefinition of a “code of ethics” required by Item 406 of Regulation S-Kpromulgated under the Exchange Act.  Thepurpose of the Code of Ethics is to promote a culture of honesty, integrity andrespect for the law and the people who work at and with the Company.  A copy of the Code of Ethics is available onour website at www.mxholdings.com under the Corporate Governance link.  We intend to timely disclose any amendmentsto or waivers of certain provisions of the Code of Ethics applicable to ourdirectors, executive officers, including our principal executive officer,principal financial officer and principal accounting officer on our website.

 

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**ITEM 11. EXECUTIVE COMPENSATION**

 

**CompensationCommittee Report**

 

TheCompensation Committee has reviewed and discussed with management the “CompensationDiscussion and Analysis,” or CD&A, section required by Item 402(b) ofRegulation S-K promulgated under the Exchange Act, which follows. Based on theCompensation Committee’s review and discussion with management, theCompensation Committee recommended to the Board of Directors that the CD&Abe included in the Company’s Annual Report.

 

THECOMPENSATION COMMITTEE:

 

DanielBergstein (Chair)

WilliamLanduyt

StuartPorter

 

*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.*

 

**Compensation**Discussion and Analysis for Named Executive Officers

** **

**As used herein, “named executive officers” refers to theCompany’s principal executive officer (the “CEO”), the Company’s principalfinancial officer (the “CFO”) and the three executive officers of the Company,other than the CEO and CFO, who were the most highly compensated executiveofficers of the Company.**

** **

***Overview of****Compensation**Program*

** **

**The CompensationCommittee is appointed by the Board of Directors to discharge the board’sresponsibilities relating to:**

**·**                 compensation of the Company’s executives;

**·**                 equity-based compensation plans,including, without limitation, stock option plans, in which officers oremployees may participate; and

**·**                 arrangements with executive officersrelating to their employment relationships with the Company, including, withoutlimitation, provisions of formal employment agreements.

** **

**The CompensationCommittee has overall responsibility for approving and evaluating executiveofficer compensation plans, policies and programs of the Company, as well asall equity-based compensation plans and policies. In addition, the CompensationCommittee oversees, reviews and approves all of the Company’s ERISA and othersignificant employee benefit plans.**

** **

***Overview of****Compensation**Philosophy 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 ourbusiness to meet our short-term and long-term business objectives;

·               motivate the executives to increasestockholder value; and

·               associate compensation with the achievementof certain short-term and long-term individual and corporate objectives.

 

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***Role of Our Compensation Committee***

** **

Our Compensation Committeeis responsible for administering our compensation practices. Our CompensationCommittee consists of three directors who are “outside directors” for purposesof Section 162(m) of the Internal Revenue Code, as amended (the “Code”).

 

The Compensation Committeereviews and approves all employment agreements and administers all aspects ofcompensation for our executive officers, including:

·                  annual base salary level;

·                  participation in incentive-based compensationplans;

·                  participation in equity-based compensationplans; and

·                  awards of any special or supplementalbenefits.

 

The Compensation Committeeconsiders compensation recommendations from our CEO in determining executivecompensation for all of the named executive officers, except in the case of theCEO.  The Compensation Committee, at itssole discretion, may accept or deny, in whole or in part, the recommendationsof the CEO.  The Board of Directors isnot required to approve the decisions of the Compensation Committee regardingcompensation of executive officers.  Theactivities of the Compensation Committee are formally reported to the Board ofDirectors, and board members are encouraged to ask questions and reviewspecific details regarding the decisions of the Compensation Committee.

 

***Elements of Compensation***

 

The compensation of ournamed executive officers consists primarily of five components:

·                  base salary;

·                  annual cash incentives;

·                  equity-based incentives;

·                  other benefits; and

·                  severance and termination protection.

 

We use a mix of short-termcompensation (annual base salaries and cash incentives) and long-termcompensation (equity-based incentives) to provide a total compensationstructure that is designed to achieve our pay-for-performance philosophy andother compensation objectives.  Althoughthe Compensation Committee has not adopted any formal guidelines for allocatingtotal compensation between short-term and long-term portions, we believe it isimportant for our executive officers to have some actual or potential equityownership in the Company to provide them with long-term incentives to improvecorporate performance.

 

During fiscal year 2008, theCompensation Committee completed a formal benchmarking initiative to review ourexecutive compensation levels in relation to a peer group of companies.  In addition, our Compensation Committeemembers are involved with a portfolio of small to mid-sized companies fromwhich they can assess the appropriateness of executive compensation levels.

 

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**Annual CashCompensation**

** **

***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.  Ingeneral, the base salaries of our named executive officers reflect:

·                  the initial base salaries that we negotiatedwith each of them at the time of their initial employment or promotion;

·                  consideration of  individual performance and increasedexperience;

·                  any changes in their appointed roles andresponsibilities;

·                  consideration of the individuals contributiontoward overall business performance;

·                  annual cost of living adjustment factors;

·                  results of any benchmarking initiatives tocompare executive salaries to peer group companies;

·                  experience of the members of the CompensationCommittee with executive salaries at other companies; and

·                  recommendations of the CEO, except in thecase of the CEO.

 

The base salaries of ourexecutive officers are reviewed and adjusted annually after their performanceevaluations are completed.

 

Base salaries for our namedexecutive officers are provided in the following table.

 
| **Name**               | ** ** | **Fiscal Year  2008** | ** ** | **Fiscal Year  2007** | ** ** |
|------------------------|------------|----------------------------|------------|----------------------------|------------|
|                   |       |                       |       |                       |       |
| Jeffrey Mayer          |       | $                          | 566,500    |                       | $          | 550,000 |   |
| Chaitu Parikh          |       | 401,700                    |       | 390,000                    |       |
| Steven Murray          |       | 463,500                    |       | 450,000                    |       |
| Carole R. Artman-Hodge |       | 390,000                    |       | 390,000                    |       |
| Robert Werner          |       | 250,000                    |       | 250,000                    |       |
|                        |            |                            |            |                            |            |  |  |

 

Forfiscal year 2008, the Compensation Committee approved a 3% cost of living increase for Messrs. Mayer,Parikh and Murray to keep their salaries within targeted market levels.  Ms. Artman-Hodge and Mr. Werner didnot receive a base salary increase for fiscal year 2008 because their basesalary already exceeded targeted market levels for their respective positionswith the Company.

 

***Annual Cash Incentive Compensation***

** **

Our named executive officershave the opportunity to receive cash incentive awards tied to our overallperformance and their individual performances.

 

The Compensation Committeeestablishes specific performance goals for the payment of annual bonuses whichare based on specific business and individual performance factors, which aredescribed in greater detail below.  Theestablishment of business and individual goals for each named executive officerreinforces two of our compensation goals: (1) to motivate our namedexecutive officers toward even higher achievement and business results; and (2) toenable us to attract and retain highly qualified individuals.

 

***Individual PerformanceFactors (“IPFs”)*** represent ratingsassigned to the named executive officers that are based on accomplishment ofindividual goals.  IPFs are calculatedafter a systematic review of each named executive officer, which results inassessment of specific accomplishments and job skills that generally fall withinthe following categories: (1) leadership, team management andorganizational skills; (2) primary job responsibilities; (3) judgmentand decision-making; (4) individual attributes; (5) peerrelationships; 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 Messrs. Mayer, Parikhand Murray and Ms. Artman-Hodge, the overall IPF rating is applied to 25%of their target bonus.  For Mr. Werner,the IPF rating is applied to 50% of his target bonus.  The Compensation Committee reviews proposedIPFs for the named executive officers.

** **

***Business PerformanceFactors (“BPFs”)***representcorporate operational goals that are considered to be essential to

 

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**the Company’s success for the fiscal year.  BPFs are used by the Company to assign anoverall corporate rating from 0% to 100%, which is generally assigned to allemployees of the Company.  For Messrs. Mayer,Parikh and Murray and Ms. Artman-Hodge, the overall BPF rating is appliedto 75% of their target bonus.  For Mr. Werner,the BPF rating is applied to 50% of his target bonus.  The BPFs established by the CompensationCommittee for the fiscal year ended June 30, 2008 were as follows:**

** **

·                  0%to 35% weighting for achievement of targeted levels of RCEs at June 30,2008, including minimum profitability levels related to RCE additions;

·                  0% to 40% weighting for operational excellence, which is measured byaccomplishment of key business performance factors including: (i) Sarbanes-Oxleycompliance; (ii) successful completion of specific information systemconversion and upgrade projects; (iii) successful integration of theGasKey Acquisition; and (iv) keeping actual operating expenses belowforecasted amounts for fiscal year 2008; and

·                  0% to 25% weighting for achievement offorecasted Adjusted EBITDA for fiscal year 2008;

 

**The cumulative result of the approved weightings is appliedto that portion of the named executive officer’s bonus that is subject to theBPF weighting.  That cumulative result isthen further adjusted for the named executive officer’s IPF rating.**

** **

Individual bonus amounts accruedfor the named executive officers for the fiscal year ended June 30, 2008,subject to final approval by the Compensation Commitee and the Board ofDirectors, are summarized in the following table.

 
| ** **             | ** ** | ** **          | ** ** | **Actual Payout** | ** ** |
|------------------------|------------|---------------------|------------|------------------------|------------|
| ** **             | ** ** | **Target% of** | ** ** | **% of**          | ** ** | ** ** | ** ** |
| **Name**               | ** ** | **Salary (1)** | ** ** | **Salary**             | ** ** | **Amount** | ** ** |
|                   |       |                |       |                   |       |   |   |
| Jeffrey Mayer          |       | 100                 | %          | 31                     |       | $ | 175,615 |   |
| Chaitu Parikh          |       | 100                 | %          | 39                     |       | 155,659 |   |
| Steven Murray          |       | 100                 | %          | 39                     |       | 179,606 |   |
| Carole R. Artman-Hodge |       | 100                 | %          | 39                     |       | 151,125 |   |
| Robert Werner          |       | 50                  | %          | 16                     |       | 38,750 |   |
|                        |            |                     |            |                        |            |  |  |  |

 

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(1)             Based upon employment agreements in place asof June 30, 2008.

 

**All of the named executive officers were awarded lower IPFportions of their total bonus for fiscal year 2008, as compared to the priorfiscal year, due to unsatisfactory operating results in relation to theforecasted Adjusted EBITDA for fiscal year 2008.**

** **

**EquityIncentive Compensation**

** **

The Company has adopted, bya vote of its shareholders, three separate stock-based compensation planspursuant to which stock options and warrants have been granted to namedexecutive officers and to other employees of the Company.  These stock-based compensation plans aredescribed in Note 17 of the consolidated financial statements includedelsewhere in this Annual Report. Stock-based awards provide our executive officers, employees and otherindividuals who have provided services to the Company with the right topurchase shares of our common stock at a fixed exercise price typically for aperiod of up to ten years, subject to continued employment with the Company.  The incentive compensation plans do not allowthe Company to establish an exercise price that is below fair market value ofour common stock on the award date.  Wehave granted stock options as incentive stock options in accordance with Section 422of the Code, as well as non-qualified stock options.  In general, options granted are service-basedstock options that have a three year vesting schedule and a ten year term.  The exercise price for options awarded toemployees who own greater than 10% of our common stock as of the date of grantis 110% of the fair market value of our common stock and the term of the optionis reduced to 5 years instead of 10 years.

 

Stock options are animportant component in our executive compensation program because the Companyhas benefited 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) at the time of annual review, which isundertaken after completion of the fiscal year; or (3) on rare occasions,following a significant event such as an acquisition.

 

We typically consider grantsof equity incentive awards to our named executive officers on an annualbasis.  The date of grant and the fair marketvalue of the awards are established by the Compensation Committee.  The fair

 

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value of the options awardedare equivalent to the fair value of our stock, which may be determined by: (1) anexternal valuation from a third party, which generally is solicited for June 30of each fiscal year; (2) an internal valuation based on the valuationprocess used for the third party valuation, which generally is performed by usat September 30, December 31 and March 31 of each fiscal year;or (3) arm’s-length transactions during the fiscal quarter preceding thegrant.

 

The Board of Directors hasdelegated responsibility to the Compensation Committee to approve all policiesand programs related to the award of stock options.  The Compensation Committee reviews andapproves all stock equity-based compensation plans.  The CEO makes recommendations to theCompensation Committee regarding the award of stock options to all namedexecutive officers, which are based on the following considerations:  (1) current value of the officer to theCompany; (2) future responsibilities and expectations of the officerduring the vesting period for the awards; (3) retention concerns, if any; (4) impressionof the officer as a “top performer”; and (5) comparisons with peers withinthe Company.  Grants are generallyapproved by the Compensation Committee based on the recommendations, aftergiving additional consideration for its members’ knowledge of market practice,actual performance of the Company for the current fiscal year and expectationsof future performance of the Company.  Wedo not make decisions regarding equity awards based on the gains or losses fromprior equity awards. In addition, we do not have any formal security ownershiprequirements.  Generally, stock awardsgranted to the named executive officers vest over a three-year period with thefirst vesting period ending on the first anniversary of the date of grant.

 

During the fiscal year endedJune 30, 2008, we did not grant any stock option awards to named executiveofficers.  The CEO and the CompensationCommittee are currently considering whether any stock compensation awards willbe recommended for the named executive officers, pending final review ofoperating and financial results for fiscal year 2008 and a review ofcompensation awards for industry peers.

 

InMarch 2008, the Compensation Committee approved the issuance of 9,500 fullyvested shares of common stock to Mr. Mayer.  Total compensation expense related toissuance of these shares was approximately $0.8 million, which included thefair value of the common stock issued ($0.5 million) and additionalcompensation in the form of a tax gross-up to offset the taxable nature of theshares to Mr. Mayer ($0.3 million). Also in March 2008, the Compensation Committee approved theissuance of 9,500 fully vested shares of common stock to Ms. Artman-Hodge.  Total compensation expense related toissuance of these shares was approximately $0.9 million, which included thefair value of the common stock issued ($0.5 million) and additionalcompensation in the form of a tax gross-up to offset the taxable nature of theshares to Ms. Artman-Hodge ($0.4 million). These shares were issued to Mr. Mayer and Ms. Artman-Hodge toreplace fully vested options that had unintentionally expired.

 

Becauseour common stock is not publicly traded, we obtain an independent valuation ofits fair value at June 30 of each fiscal year and we calculate its fairvalue at September 30, December 31 and March 31 of each fiscalyear using an internally developed model that approximates the independentmodel.

 

**OtherCompensation**

 

All of our executiveofficers are eligible for benefits offered to employees generally, includinglife, health, disability and dental insurance and participation in our 401(k) plan.  We intend to continue to maintain our currentbenefits for our executive officers, as well as for all of our full-timeemployees.  The Compensation Committeemay, at its sole discretion revise, amend or add to the named executive officer’sbenefits and perquisites if deemed advisable. We do not believe it is necessaryfor the attraction or retention of management talent to provide the officerswith a substantial amount of compensation in the form of perquisites.  During fiscal year 2008, in addition tomatching the 401(k) contributions of all of the named executive officers,we made reimbursement payments to Mr. Mayer for legal fees in connectionwith preparation of his employment agreement and reimbursement payments to Messrs. Mayerand Murray for club fees.

 

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**Accountingand Tax Considerations**

** **

**Effective July 1, 2006, we adopted, on a prospectivebasis, the fair market value provisions of SFAS No. 123R.  Under SFAS No. 123R, the estimated fairvalue of options granted, net of forfeitures expected to occur, is amortized ascompensation expense over the vesting period of the options based on theaccelerated attribution method as specified in FASB Interpretation No. 28.  For additional information, see Notes 2and 17 of our audited consolidated financial statements included elsewhere inthis 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 2008 Actions**

** **

***Fiscal Year 2009 Salary Actions***

 

The Compensation Committeehas approved the following base salaries for the named executive officers forthe fiscal year ended June 30, 2009:

 
| **Name**          | ** ** | **Fiscal Year  2009** | ** ** |
|-------------------|------------|----------------------------|------------|
|              |       |                       |       |
| Jeffrey Mayer     |       | $                          | 594,825    |   |
| Chaitu Parikh     |       | 421,785                    |       |
| Steven Murray     |       | 486,675                    |       |
| Robi Artman-Hodge |       | 390,000                    |       |
| Robert Werner     |       | 250,000                    |       |
|                   |            |                            |            |  |

 

For fiscal year2009, the Compensation Committee approved a 5% cost of living increase for Messrs. Mayer,Parikh and Murray to keep their salaries within targeted market levels.  Ms. Artman-Hodge and Mr. Werner didnot receive a base salary increase for fiscal year 2008 because their basesalary already exceeded targeted market levels for their respective positionswith the Company.

 

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**Summary Compensation Table**

 

Compensation for the namedexecutive officers is summarized in the following table.

** **
| **Name and Principal Position** | ** ** | **Year** | ** ** | **Salary** | ** ** | **Stock  Awards (1)** | ** ** | **Bonus  (2)** | ** ** | **Option  Awards  (3)** | ** ** | **Non-equity  Incentive  Plan (4)** | ** ** | **All Other  (5)** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|----------|------------|------------|------------|----------------------------|------------|----------------|------------|-------------------------|------------|------------------------------------------|------------|-------------------------|------------|-----------|------------|
|                                           |       |     |       |       |       |                       |       |           |       |                    |       |                                     |       |                    |       |      |       |
| **Jeffrey  Mayer**                             |       | 2008     |       | $          | 566,183    |                       | $          | 475,950        |       | $                       | —     |                                     | $          | 92,019                  |       | $         | 236,115    |   | $ | 366,564 |   | $ | 1,736,831 |   |
| *President  and Chief Executive Officer*       |       | 2007     |       | 547,745    |       | —                     |       | 250,000        |       | 87,260                  |       | 324,500                                  |       | 13,702                  |       | 1,223,207 |       |
|                                           |       |     |       |       |       |                       |       |           |       |                    |       |                                     |       |                    |       |      |       |
| **Chaitu Parikh**                              |       | 2008     |       | 401,475    |       | —                     |       | —         |       | 202,261                 |       | 202,859                                  |       | 16,189                  |       | 822,784   |       |
| *Vice President and Chief Financial Officer*   |       | 2007     |       | 389,098    |       | —                     |       | 200,000        |       | 191,799                 |       | 253,100                                  |       | 16,500                  |       | 1,050,497 |       |
|                                           |       |     |       |       |       |                       |       |           |       |                    |       |                                     |       |                    |       |      |       |
| **Steven Murray**                              |       | 2008     |       | 463,180    |       | —                     |       | —         |       | 777,925                 |       | 222,406                                  |       | 37,539                  |       | 1,478,415 |       |
| *Chief Operating Officer*                      |       | 2007     |       | 389,423    |       | —                     |       | 150,000        |       | 737,688                 |       | 229,800                                  |       | 43,128                  |       | 1,550,039 |       |
|                                           |       |     |       |       |       |                       |       |           |       |                    |       |                                     |       |                    |       |      |       |
| **Carole R. Artman-Hodge**                     |       | 2008     |       | 390,000    |       | 475,950                    |       | —         |       | 202,261                 |       | 180,925                                  |       | 390,086                 |       | 1,639,222 |       |
| *Executive Vice President*                     |       | 2007     |       | 389,662    |       | —                     |       | 150,000        |       | 191,799                 |       | 159,600                                  |       | 20,249                  |       | 911,310   |       |
|                                           |       |     |       |       |       |                       |       |           |       |                    |       |                                     |       |                    |       |      |       |
| **Robert Werner**                              |       | 2008     |       | 250,000    |       | —                     |       | —         |       | 230,103                 |       | 47,050                                   |       | —                  |       | 527,153   |       |
| *Vice President, Supply*                       |       | 2007     |       | 216,346    |       | —                     |       | —         |       | 317,388                 |       | 44,700                                   |       | 19,250                  |       | 597,684   |       |
|                                                |            |          |            |            |            |                            |            |                |            |                         |            |                                          |            |                         |            |           |            |  |  |  |  |  |  |  |

 

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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. Mayerand Parikh and Ms. Artman-Hodge, the 2007 amount represents a cash bonuspaid in 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, 2008 and2007.

(4)        Amounts includeperformance bonuses for fiscal year 2008, as accrued at June 30, 2008 (Mr. Mayer:$175,615; Mr. Parikh: $155,659; Mr. Murray: $179,606; Ms. Artman-Hodge:$151,125; Mr. Werner: $38,750), as well as adjustments to performancebonuses for fiscal year 2007, as originally accrued at June 30, 2007 (Mr. Mayer:$60,500; Mr. Parikh: $47,200; Mr. Murray: $42,800; Ms. Artman-Hodge:$29,800; Mr. Werner: $8,300). Amounts reflected are exclusively cash awards.

(5)        This column reflects: (1) contributionsto the Company-sponsored employee savings plan under Section 401(k) ofthe Code (Mr. Mayer: $10,894; Mr. Parikh: $16,189; Mr. Murray:$14,904; Ms. Artman-Hodge: $20,750; and Mr. Werner: $19,730); (2) reimbursementfor legal fees in connection with the preparation of employment agreements (Mr. Mayer:$10,621);  and (3) club fees (Mr. Mayer:  $12,000; Mr. Murray: $22,635); and (4)additional compensation in the form of a tax gross-up paid by the Company onbehalf of named executive officers to offset the tax consequences of awards ofcommon stock granted during fiscal 2008 (Mr. Mayer; $333,049; Ms. Artman-Hodge:$369,336).

 

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**2008Grants of Plan-Based Awards**

 

The Company did not grant any share-based compensationawards during the fiscal year ended June 30, 2008.  Information with respect to grants ofnon-equity plan-based awards granted to the named executive officers for fiscalyear 2008 is presented 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 (2)** | ** ** |
|                   |       |                                                                                        |       |                                                       |       |                                            |       |   |   |   |   |
| Jeffrey Mayer          |       | $                                                                                           | 0          |                                                       | $          | 566,500                                         |       | $ | 679,800 |   | 9,500 |   | $ | 475,950 |   |
| Chaitu Parikh          |       | 0                                                                                           |       | 401,700                                                    |       | 482,040                                         |       | — |   | — |   |
| Steven Murray          |       | 0                                                                                           |       | 463,500                                                    |       | 463,500                                         |       | — |   | — |   |
| Carole R. Artman-Hodge |       | 0                                                                                           |       | 390,000                                                    |       | 390,000                                         |       | 9,500 |   | $ | 475,950 |   |
| Robert Werner          |       | 0                                                                                           |       | 125,000                                                    |       | 250,000                                         |       | — |   | — |   |
|                        |            |                                                                                             |            |                                                            |            |                                                 |            |  |  |  |  |  |  |  |  |

 

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(1)         Amounts reflect the range of potential short-term incentivepayouts under the Company’s cash incentive bonus program.  For fiscal year 2008 performance, the actualpayout, as well as the business objectives and percentage of target achieved,are disclosed above under “Annual Cash Incentive Compensation”.

(2)         Represents the fair market value of the Company’s commonstock on the award grant date.

 

**OutstandingEquity Awards at June 30, 2008**

 

Outstandingequity awards for the named executive officers are summarized in the followingtable.

 
| ** **             | ** ** | **Option Awards**                                                        | ** ** |
|------------------------|------------|-------------------------------------------------------------------------------|------------|
| **Name**               | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Unexercisable** | ** ** | **Option  Exercise  Price** | ** ** | **Option  Expiration  Date** | ** ** |
|                   |       |                                                                          |       |   |   |   |   |   |   |
| Jeffrey Mayer          |       | 16,550                                                                        |       | — |   | $ | 8.80 |   | 1/21/2009 |   |
| Jeffrey Mayer          |       | 48,000                                                                        |       | — |   | 23.65 |   | 10/19/2009 |   |
| Jeffrey Mayer          |       | 21,000                                                                        |       | — |   | 30.25 |   | 6/26/2010 |   |
| Jeffrey Mayer          |       | 13,000                                                                        |       | 26,000 |   | 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          |       | 13,000                                                                        |       | 26,000 |   | 42.57 |   | 11/13/2016 |   |
| Steven Murray          |       | 50,000                                                                        |       | 100,000 |   | 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 |       | 13,000                                                                        |       | 26,000 |   | 42.57 |   | 11/13/2016 |   |
| Robert Werner          |       | 16,667                                                                        |       | 33,333 |   | 42.57 |   | 11/13/2016 |   |
|                        |            |                                                                               |            |  |  |  |  |  |  |  |

 

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***OptionExercises***

 

*Options or warrants exercised bynamed executive officers during the fiscal year ended June 30, 2008 aresummarized in the following table.*

* *
| **Name**               | ** ** | **Number of  Shares  Acquired on  Exercise** | ** ** | **Value  Realized on  Exercise** | ** ** |
|------------------------|------------|--------------------------------------------------------|------------|---------------------------------------|------------|
|                   |       |                                                   |       |                                  |       |
| Jeffrey Mayer          |       | 18,700                                                 |       | $                                     | 772,310    |   |
| Chaitu Parikh          |       | 20,000                                                 |       | 892,200                               |       |
| Carole R. Artman-Hodge |       | 18,700                                                 |       | 772,310                               |       |
|                        |            |                                                        |            |                                       |            |  |

 

***Pension Benefits***

 

*The Company does not provide anypost-retirement pension benefits to any of its named executive officers.*

 

***Nonqualified DeferredCompensation Plans***

 

*The Company does not provide anynonqualified deferred compensation programs for any of its named executiveofficers.*

 

**Agreementswith Named Executive Officers**

 

***Jeffrey Mayer Employment Agreement***

 

OnFebruary 13, 2008, the Company entered into a new employment agreementwith Mr. Mayer (the “Mayer Agreement”). The Mayer Agreement replaces a previous employment agreement dated April 1,1999.  The material differences in theMayer Agreement 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, the Company included these revised terms to reflect market practices, andMr. Mayer’s increased responsibilities and authority.

 

Theinitial term of the Mayer Agreement is four years and is automatically renewedfor successive one-year terms unless either party gives the other 180 days’notice that the Mayer Agreement will not be extended or if the Mayer Agreementis otherwise terminated.  Pursuant to theMayer Agreement, Mr. Mayer’s office will be located in the Company’sheadquarters in Stamford, Connecticut, and he will report to the Company’sBoard of Directors.  In addition to hisposition as CEO, the Company agrees to use its best efforts to ensure that Mr. Mayerwill continue to serve as a member of the Board of Directors.

 

Pursuantto the Mayer Agreement, Mr. Mayer will receive an annual base salary of$566,500, which may be increased from time to time by the Company, 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 affecting the Company.

 

Inthe event that Mr. Mayer is terminated involuntarily and without “businessreasons” (as such term is defined in the Mayer Agreement, which generallyincludes “cause” events such as felony conviction, fraud or insubordination) ora “constructive termination” (as such term is defined in the Mayer Agreement,such as a material reduction in salary or authority or a relocation) occurs, Mr. Mayerwill be entitled to receive (i) his then current base salary, any paidtime 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 of

 

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termination,or (b) his then current base salary for the remainder of the then currentemployment term; and (iii) a lump sum payment equal to (a) 100% ofthe target bonus for the fiscal year in which the date of termination occurs, (b) 100%of the target bonus for any full fiscal year remaining during the thenapplicable employment term, and (c) a pro rata portion of 100% of thetarget bonus being paid for the final fiscal year that begins during the thenapplicable employment term.  In addition,all of Mr. Mayer’s unvested stock options, restricted stock, and otherequity awards shall become fully vested and all stock options that are vestedand outstanding (but unexercised) on the date of termination will be cancelledand the Company will pay to Mr. Mayer, with respect to each option, anamount equal to the excess of the fair market value per share of the sharesunderlying such option over the exercise price of such option multiplied by thenumber of shares underlying such option. In addition, Mr. Mayer’s benefits will continue for the duration ofthe then current employment term.

 

Ifthere is a change in control (as such term is defined in the Mayer Agreement)and either a constructive termination occurs or the Company terminates Mr. Mayer’semployment without business reasons prior to the expiration of the then currentemployment term, Mr. Mayer will be entitled to receive (i) his thencurrent base salary, any paid time off, and any earned and unpaid target bonusaccrued through the date of termination; (ii) a lump sum payment equal tothe greater of (a) two times his then current base salary or (b) histhen current base salary for the remainder of the then current employment term;(iii) a lump sum payment equal to the greater of (a) 200% of the targetbonus for the fiscal year in which the termination occurs, or (b) 100% ofthe target bonus for the fiscal year in which the termination occurs times thenumber of years 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.

 

IfMr. Mayer is terminated as a result of death or disability (as such termis defined in the Mayer Agreement), he or his representative, as the case maybe, is entitled to receive (i) any accrued and unpaid salary; (ii) anyaccrued and unpaid target bonus for the prior fiscal year; (iii) a prorata portion of any target bonus that he would have otherwise earned during thefiscal year in which the termination occurs; and (iv) any accrued andunpaid time off.  Mr. Mayer’soutstanding stock options, restricted stock, and other equity arrangementsshall expire in accordance with the terms of the applicable award agreements.

 

IfMr. Mayer voluntarily terminates his employment (other than in the case ofa constructive termination), or he is terminated involuntarily for businessreasons, he will be entitled to receive (i) all accrued and unpaid salary,all accrued and unpaid target bonus for the prior fiscal year, and a pro rataportion of any target bonus that he would have otherwise earned during thefiscal year in which such termination occurs and (ii) all accrued butunpaid time off and other benefits due to him through his termination dateunder any Company-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.

 

IfMr. Mayer’s employment is terminated for any reason, the Company has theinitial right to purchase all (but not less than all) of the common stock ofthe Company held by Mr. Mayer by making a written offer within 60 days oftermination.  If Mr. Mayer isinvoluntarily terminated for any reason (including a constructive termination)other than for business reasons, but the Company does not offer to purchase hisshares of common stock of the Company within 60 days of termination, Mr. Mayerhas the right to cause the Company to repurchase all (but not less than all) ofhis common stock of the Company.  Theforegoing rights terminate upon an initial public offering of the Company’scommon stock.

 

TheMayer Agreement provides that in the event that Mr. Mayer becomes entitledto payments or benefits that would constitute an “excess parachute payment”within the meaning of Section 280G of the Code, the payment and/orbenefits will be reduced to the extent that such payments will not be subjectto the excise tax or any interest or penalties imposed by Section 4999 ofthe Code, referred to herein as the 280G Reduction. The 280G Reduction willonly take place if Mr. Mayer’s “net after tax benefit” (as defined in theMayer Agreement) exceeds the net after tax benefit he would realize if the 280GReduction were not made. To the extent, the 280G Reduction is unavailablebecause Mr. Mayer’s net after tax benefit would be greater if the 280GReduction were not made, the Company will pay Mr. Mayer a gross up paymentin an amount such that after the payment by Mr. Mayer of all taxes(including any income taxes, interest, penalties or any excise taxes), Mr. Mayerwould retain an amount of the gross-up payment equal to seventy-five (75%) ofany excise tax imposed upon the payments received by Mr. Mayer.

 

TheMayer Agreement also contains restrictive covenants, which apply for theremainder of the then-current agreement term. Pursuant to the restrictive covenants, Mr. Mayer is generallyprohibited from (1) owning or

 

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providingservices for any business competing with that of the Company for the remainderof the agreement term; (2) inducing employees to leave the employ of theCompany or hiring them (unless the employee contacts Mr. Mayer on anunsolicited basis); (3) soliciting any customer, supplier, licensee orother business relation of the Company or (4) disparaging the Company, itsexecutive officers, or its directors.  Inthe 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.

 

***Chaitu Parikh Employment Agreement***

 

OnFebruary 13, 2008, the Company entered into a new employment agreementwith Mr. Parikh, as the Chief Financial Officer and Senior Vice Presidentof the Company (the “Parikh Agreement”). The Parikh Agreement replaces a previous employment agreement dated November 1,2002.  The material differences in theParikh Agreement 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, the Companyincluded these revised terms to reflect market practices, and Mr. Parikh’sincreased responsibilities and authority.

 

Theinitial term of the Parikh Agreement is three years and is automaticallyrenewed for successive one-year terms unless either party gives the other 180days’ notice that the Parikh Agreement will not be extended or if the ParikhAgreement is otherwise terminated.  Pursuantto the Parikh Agreement, Mr. Parikh’s office will be located in theCompany’s headquarters in Stamford, Connecticut, and he will report to theCompany’s Board of Directors.

 

Pursuantto the Parikh Agreement, Mr. Parikh will receive an annual base salary of$401,700, which may be increased from time to time by the Company, 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 affecting the Company.

 

Inthe event that Mr. Parikh is terminated involuntarily and without “businessreasons” (as such term is defined in the Parikh Agreement, which generallyincludes “cause” events such as felony conviction, fraud or insubordination) ora “constructively termination” (as such term is defined in the ParikhAgreement, such as a material reduction in salary or authority or a relocation)occurs, Mr. Parikh will be entitled to receive (i) his then currentbase salary, any unpaid time off and any earned and unpaid target bonus accruedthrough the date of termination; (ii) a lump sum payment equal to thegreater of (a) his then current base salary for a period of twelve monthsfollowing the date of termination, or (b) his then current base salary forthe remainder of the then current employment term; and (iii) a lump sumpayment equal to (a) 100% of the target bonus for the fiscal year in whichthe date of termination occurs, (b) 100% of the target bonus for any fullfiscal year remaining during the then applicable employment term, and (c) apro rata portion of 100% of the target bonus being paid for the final fiscal yearthat begins during the then applicable employment term.  In addition, all of Mr. Parikh’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 the Company willpay to Mr. Parikh, with respect to each option, an amount equal to theexcess of the fair market value per share of the shares underlying such optionover the exercise price of such option multiplied by the number of sharesunderlying such option.  In addition, Mr. Parikh’sbenefits will continue for the duration of the then current employment term.

 

Ifthere is a change in control (as such term is defined in the employmentagreement) and either a constructive termination occurs or the Companyterminates Mr. Parikh’s employment without business reasons prior to theexpiration of the then current employment term, he will be entitled to receive (i) histhen current base salary, any paid time off, and any earned and unpaid targetbonus accrued through the date of termination; (ii) a lump sum paymentequal to the greater of (a) two times his then current base salary or (b) histhen current base salary for the remainder of the then current employment term;(iii) a lump sum payment equal to the greater of (a) 200% of thetarget bonus for the fiscal year in which the termination occurs, or (b) 100%of the target bonus for the fiscal year in which the termination occurs timesthe number of years for the remainder of the then current employment term.  In

 

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addition,all of Mr. Parikh’s unvested stock options, restricted stock, and otherequity awards shall become fully vested.

 

IfMr. Parikh is terminated as a result of death or disability (as such termis defined in the Parikh Agreement), he or his representative, as the case maybe, will be entitled to receive (i) any accrued and unpaid salary; (ii) 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 andunpaid paid time off.  Mr. Parikh’soutstanding stock options, restricted stock, and other equity arrangementsshall expire in accordance with the terms of the applicable award agreements.

 

IfMr. Parikh voluntarily terminates his employment (other than in the caseof a constructive termination), or he is terminated involuntarily for businessreasons, he will be entitled to receive (i) all accrued and unpaid salary,all accrued and unpaid target bonus for a prior fiscal year, and a pro rataportion of any target bonus that he would have otherwise earned during thefiscal year in which such termination occurs and (ii) all accrued butunpaid paid time off and other benefits due to him through his termination dateunder any Company-provided or paid plans, policies, and arrangements.  Mr. Parikh’s stock options, restrictedstock, and other equity arrangements will cease vesting immediately and suchawards will expire in accordance with the terms of the applicable awardagreements.

 

IfMr. Parikh’s employment is terminated for any reason, the Company has theinitial right to purchase all (but not less than all) of the common stock ofthe Company held by Mr. Parikh by making a written offer within 60 days oftermination.  If Mr. Parikh isinvoluntarily terminated for any reason (including a constructive termination)other than for business reasons, but the Company does not offer to purchase hisshares of common stock of the Company within 60 days of termination, Mr. Parikhhas the right to cause the Company to repurchase all (but not less than all) ofhis common stock of the Company.  Theforegoing rights terminate upon an initial public offering of the Company’scommon stock.

 

TheParikh Agreement provides that in the event that Mr. Parikh becomesentitled to payments or benefits that would constitute an “excess parachutepayment” within the meaning of Section 280G of the Code, the paymentand/or benefits will be reduced to the extent that such payments will not besubject to the excise tax or any interest or penalties imposed by Section 4999of the Code, referred to herein as the 280G Reduction. The 280G Reduction willonly take place if Mr. Parikh’s “net after tax benefit” (as defined in theParikh Agreement) exceeds the net after tax benefit he would realize if the280G Reduction were not made. To the extent, the 280G Reduction is unavailablebecause Mr. Parikh’s net after tax benefit would be greater if the 280GReduction were not made, the Company will pay Mr. Parikh a gross uppayment in an amount such that after the payment by Mr. Parikh of alltaxes (including any income taxes, interest, penalties or any excise taxes), Mr. Parikhwould retain an amount of the gross-up payment equal to seventy-five (75%) ofany excise tax imposed upon the payments received by Mr. Parikh.

 

TheParikh Agreement also contains restrictive covenants, which apply for theremainder of the then-current agreement term. Pursuant to the restrictive covenants, Mr. Parikh is generallyprohibited from (1) owning or providing services for any businesscompeting with that of the Company for the remainder of the agreement term; (2) inducingemployees to leave the employ of the Company or hiring them (unless theemployee contacts Mr. Parikh on an unsolicited basis); (3) solicitingany customer, supplier, licensee or other business relation of the Company or (4) disparagingthe Company, its executive officers, or its directors.  In the event that Mr. Parikh violatesthe provisions of the restrictive covenants, he will not be entitled to any severancebenefits upon a termination without business reasons or upon a constructivetermination.  Additionally, upon any suchviolation, all of Mr. Parikh’s unexercised options, whether vested orunvested, shall be cancelled.

 

***Steven Murray Employment Agreement***

 

Weentered into an employment agreement with Mr. Murray dated August 4,2006 (the “Murray Agreement”), in connection with Mr. Murray’s employmentas our COO.  The initial term of theMurray Agreement is three years and is automatically extended for one year atthe end of the initial term, unless we or Mr. Murray gives the other partyat least 180 days’ advance notice to the contrary. Pursuant to the MurrayAgreement, Mr. Murray’s office will be located in the Company’s Houston,Texas offices 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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TheMurray Agreement provides that Mr. Murray will receive an annual basesalary of $450,000, which may be increased at the Company’s discretion. TheMurray Agreement also provides that Mr. Murray is eligible for anexecutive bonus, which may be 100% of Mr. Murray’s base salary. The targetbonus is based on the following: (1) 75% is based on the performance ofthe Company or Mr. Murray and (2) 25% is based on the Company’sdiscretion. Additionally, the Company may award Mr. Murray up to 20% ofhis base salary in connection with his extraordinary performance with respectto a significant business event affecting the Company; provided that themaximum actual bonus will not exceed 120% of base salary. The Murray Agreementalso provides that the Company will grant to Mr. Murray an option topurchase 150,000 shares of common stock which will vest in three equalinstallments over three years commencing with the first anniversary of theinitial term.

 

Inthe event Mr. Murray’s employment is terminated prior to an initial publicoffering of the common stock of the Company, the Company shall have the rightto purchase all of the common stock owned by Mr. Murray and Mr. Murrayshall have the right to require the Company to purchase all of such stock, bothbased upon the fair market value of the common stock.

 

Inthe event that we terminate Mr. Murray’s employment without a “businessreason” (as defined in the Murray Employment Agreement, which generallyincludes “cause” events such as felony conviction, fraud or insubordination) ora “constructive termination” (as defined in the Murray Agreement, such as amaterial reduction in salary or authority or a relocation) occurs Mr. Murraywill be entitled to: (1) a lump sum payment equal to the greater of (a) basesalary for 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’sunvested stock options, restricted stock and other equity awards shall becomefully vested, and all vested but outstanding stock options shall be cancelledin consideration of the Company’s payment to Mr. Murray of an amount equalto (x) the fair market value for the shares underlying the option, (y) overthe exercise price of such option, (z) multiplied by the number of sharessubject to the option; and (4) any accrued, but unpaid, compensation.

 

Ifthere is a change of control during the initial term of the Murray Agreementand the Company terminates Mr. Murray’s employment without businessreasons prior to the end of the initial term of the agreement (or within a yearfollowing a change of control) prior to the end of the initial term of theagreement (or within a year following a change of control) or a constructivetermination occurs, Mr. Murray will be entitled to receive the following: (1) alump sum payment equal to the greater of (a) base salary for a period oftwo years following the date of termination or (b) base salary for theremainder of the then-current agreement term and (2) a lump sum paymentequal to the greater of (a) 200% of the target bonus for the fiscal yearin which the termination occurs; (b) 100% of the target bonus for any fullfiscal year remaining during the initial term of the agreement times the numberof years for the remainder of the then-current agreement term; (3) Mr. Murray’sunvested stock option, restricted stock and other equity awards shall becomefully vested and (4) any accrued, but unpaid, compensation.

 

Inthe event of termination due to disability, Mr. Murray will be entitled toall earned, but unpaid compensation, payments and benefits in accordance withthe disability policy of the Company, the “in the money” value of all vestedoptions, a pro rata portion of any target bonus Mr. Murray would haveotherwise earned during the fiscal year in which the disability occurs, and anyaccrued, but unpaid, compensation.

 

IfMr. Murray voluntarily terminates his employment or the Companyinvoluntarily terminates his employment for business reasons, all equity awardswill expire according to the terms of the award agreement, Mr. Murray willreceive any accrued, but unpaid, compensation, and Mr. Murray will receivea pro rata portion of any target bonus that he would have otherwise earnedduring the fiscal year in which his termination occurs.

 

IfMr. Murray’s employment terminates due to death, Mr. Murray’srepresentative will receive payments and benefits in accordance with the thenapplicable plans, policies, or arrangements, all equity awards will expireaccording to the terms of the award agreement (provided Mr. Murray will beentitled to the “in the money” value of all vested options), Mr. Murraywill receive any accrued, but unpaid, compensation, and Mr. Murray will beentitled to receive a pro rata portion of any target bonus that he would haveotherwise earned during the fiscal year in which his termination occurs.

 

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TheMurray Agreement also contains restrictive covenants, which apply for theremainder of the then-current agreement term. Pursuant to the restrictivecovenants, Mr. Murray is generally prohibited from (1) owning orproviding services for any business competing with that of the Company for theremainder of the agreement term; (2) inducing employees to leave theemploy of the Company or hiring them; (3) soliciting any customer,supplier, licensee or other business relation of the Company or (4) disparagingthe Company, its executive officers, or its directors.  In the event that Mr. Murray violatesthe provisions of the restrictive covenants, he will not be entitled to anyseverance benefits upon a termination without business reasons or upon aconstructive termination.  Additionally,upon any such violation, all of Mr. Murray’s unexercised options, whethervested or unvested, shall be cancelled.

 

***Carole R. Artman-Hodge Employment Agreement***

 

Weentered into an employment agreement with Ms. Artman-Hodge dated April 1,1999 (the “Artman-Hodge Agreement”).  TheArtman-Hodge Agreement commenced on the date of the closing of the Company’sequity capital transaction in connection with Ms. Artman-Hodge’semployment as our Executive Vice President and Chief Financial Officer.  The initial term of the agreement was fiveyears and is automatically extended for successive five-year terms, unless weor Ms. Artman-Hodge gives the other party at least six months’ advancenotice to the contrary.

 

TheArtman-Hodge Agreement provides that Ms. Artman-Hodge’s base salary may beincreased from time to time.  In fiscalyear 2007, Mr. Artman-Hodge’s base salary was $389,662.  The Artman-Hodge Agreement also provides thatMs. Artman-Hodge is eligible for an annual year-end bonus and toparticipate in the Company’s incentive stock option plans. Under a provision ofthe Artman-Hodge Agreement, Ms. Artman-Hodge also acknowledges and agreesthat as a founder and owner of a substantial equity interest in the Companythat she is subject to the Shareholders Agreement, dated as of May 1,1999, between the Company and certain shareholders.

 

Inthe event that we terminate Ms. Artman-Hodge’s employment relationshipwithout “cause” (as defined in the Artman-Hodge Agreement, which generallymeans felony conviction, fraud or a material breach of the agreement), Ms. Artman-Hodgewill be entitled to a lump sum severance payment of 36 months of her basesalary in effect at the time of her termination plus any unvested warrants,options or other securities awarded to her pursuant to the incentive stockoption plans by us. Additionally, she will vest in the pro rata portion of anywarrants or options that are scheduled to vest on the vesting date nextsucceeding the effective date of her termination and forfeit the right toreceive all remaining 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.

 

TheArtman-Hodge Agreement also contains a non-compete provision, which appliesduring the term of Ms. Artman-Hodge’s employment and for a period of oneyear thereafter, whether her termination of employment is with or without causeor whether the termination is initiated by Ms. Artman-Hodge or theCompany. Pursuant to the non-compete provision, Ms. Artman-Hodge isprohibited from (1) working with, or providing services to, any person orentity which was a customer of the Company at the date of cessation of herconsulting or employment relationship, as the case may be or within thetwelve-month period preceding such date, or which was contracted as a clientprospect by any representative of the Company within 90 days prior to such dateof cessation; or (2) soliciting or inducing any employee of the Company toleave its employ or to hire or attempt to hire any such employee.

 

Forpurposes of the Artman-Hodge Agreement, cause means: (i) conviction of, orpleading guilty to, a felony-class crime; (ii) any action taken in badfaith by Ms. Artman-Hodge that has, or is likely to have, in the Company’sreasonable judgment, a material, detrimental effect on the reputation of theCompany or its business; (iii) an act of fraud, dishonesty or grossmisconduct by Ms. Artman-Hodge; (iv) a material breach by Ms. Artman-Hodgeof any provision of the Artman-Hodge Agreement that has not been cured within30 days after written notice of such breach by the Company.

 

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***Robert Werner Employment Agreement***

 

Weentered into an employment agreement with Mr. Werner dated August 14,2006 (the “Werner Agreement”), in connection with Mr. Werner’s employmentas our Vice President of Supply. Under the Werner Agreement, the parties mayterminate the Werner Agreement at any time provided either party gives theother at least 60 days’ advance notice of termination.  Mr. Werner’s office will be located inthe Company’s Houston, Texas executive offices and he will report to the COO ofthe Company.

 

TheWerner Agreement provides that Mr. Werner will receive an annual basesalary of $250,000, which may be increased at the Company’s discretion.  The Werner Agreement also provides that Mr. Werneris eligible for an executive bonus, which is expected to range from 50 to 100%of Mr. Werner’s base salary.

 

Theagreement also provides that the Company will grant to Mr. Werner anoption to purchase 50,000 shares of common stock which will vest in three equalinstallments over three years commencing with the first anniversary of the dateof grant. In the event Mr. Werner’s employment is terminated for anyreason, any unvested stock option will terminate. If the Company terminates Mr. Werner’semployment for business reasons (as defined below) all vested stock optionswill be forfeited. In the event, Mr. Werner’s employment is terminated forany reason that does not constitute a business reason, stock options willexpire in accordance with the terms of the award agreement.

 

Additionally,if Mr. Werner’s employment is terminated for any reason, the Company shallhave the right to purchase all of the Company’s common stock owned by Mr. Werner,provided that if the amount payable to Mr. Werner exceeds $200,000, theCompany may pay the excess to Mr. Werner in quarterly installments with 5%interest over a period of three years and the Company’s obligation to make suchpayment shall be suspended during any period that the payment would cause theCompany to violate a loan or similar financial covenant.

 

Inthe event that the Company terminates Mr. Werner’s employment without a “businessreason” (as defined below) or Mr. Werner terminates his employment for anyreason that constitutes a constructive termination (as defined below), Mr. Wernerwill be entitled to a lump sum payment equal to his base salary for theremainder of the employment term. For purposes of severance, Mr. Werner’semployment term will be deemed to be three years. If the Company terminates Mr. Werner’semployment for business reasons or Mr. Werner terminates his employmentfor any reason that does not constitute a constructive termination, he will beentitled to any accrued and unpaid salary.

 

Inthe event that the Company terminates Mr. Werner’s employment without a “businessreason” (as defined in the Werner Agreement, which generally includes a felonyconviction, fraud or insubordination) or Mr. Werner terminates hisemployment for any reason that constitutes a “constructive termination” (asdefined in the Werner Agreement, such as such as a material reduction in salaryor authority or a relocation), Mr. Werner will be entitled to a lump sumpayment equal to his base salary for the remainder of the employment term.  For purposes of severance, Mr. Werner’semployment term will be deemed to be three years. If the Company terminates Mr. Werner’semployment for business reasons or Mr. Werner terminates his employmentfor any reason that does not constitute a constructive termination, he will beentitled to any accrued and unpaid salary.

 

TheWerner Agreement also contains a non-compete provision, which applies for threeyears commencing upon the effective date of the agreement. Pursuant to thenon-compete provision, Mr. Werner is generally prohibited from (1) owningor providing services for any business competing with that of the Company forthe remainder of the agreement term; (2) inducing employees to leave theemploy of the Company or hiring them; (3) soliciting any customer,supplier, licensee or other business relation of the Company or (5) disparagingthe Company, its executive officers, or its directors.  In the event that Mr. Werner violatesthe provisions of the restrictive covenants, he will not be entitled to anyseverance benefits upon a termination without business reasons or upon aconstructive termination.  Additionally,upon any such violation, all of Mr. Werner’s unexercised options, whethervested or unvested, shall be cancelled.

 

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**Post-EmploymentPayments**

 

Thefollowing table summarizes the payments that the Company would have beenrequired to make to the named executive officers as of June 30, 2008 as aresult of their termination, retirement, disability or death or a change incontrol of the Company as of that date. The specific circumstances identified in the table that would triggersuch payments are described in the employment agreement for each executive.

 
| ** **                     | ** ** | **Termination Event**                                                  | ** ** |
|--------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Involuntary  Without Cause  or For  Constructive  Termination** | ** ** | **Involuntary  With Cause or  Without  Constructive  Termination** | ** ** | **Change in  Control** | ** ** | **Disability** | ** ** | **Death** | ** ** |
|                           |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Jeffrey Mayer:**             |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash severance payment         |       | $                                                                           | 4,836,336  |   | $ | 186,509 |   | $ | 4,269,836 |   | $ | 186,509 |   | $ | 186,509 |   |
| Acceleration of stock options  |       | 725,694                                                                     |       | — |   | 725,694 |   | 725,694 |   | 725,694 |   |
| Health and life insurance      |       | 35,706                                                                      |       | — |   | — |   | — |   | — |   |
| Continuation of perquisites    |       | 36,000                                                                      |       | — |   | — |   | — |   | — |   |
| Value of tax gross-up payments |       | —                                                                      |       | — |   | 2,151,010 |   | — |   | — |   |
| Total termination benefits     |       | $                                                                           | 5,633,736  |   | $ | 186,509 |   | $ | 7,146,540 |   | $ | 912,203 |   | $ | 912,203 |   |
|                           |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Chaitu Parikh:**             |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash severance payment         |       | 2,660,224                                                                   |       | 166,474 |   | 2,258,524 |   | 166,474 |   | 166,474 |   |
| Acceleration of stock options  |       | 975,096                                                                     |       | — |   | 975,096 |   | 975,096 |   | 975,096 |   |
| Health and life insurance      |       | 24,524                                                                      |       | — |   | — |   | — |   | — |   |
| Value of tax gross-up payments |       | —                                                                      |       | — |   | 1,407,406 |   | — |   | — |   |
| Total termination benefits     |       | $                                                                           | 3,659,844  |   | $ | 166,474 |   | $ | 4,641,026 |   | $ | 1,141,570 |   | $ | 1,141,570 |   |
|                           |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Steven Murray:**             |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash severance payment         |       | $                                                                           | 1,426,923  |   | $ | 194,759 |   | $ | 1,426,923 |   | $ | 194,759 |   | $ | 194,759 |   |
| Total termination benefits     |       | $                                                                           | 1,426,923  |   | $ | 194,759 |   | $ | 1,426,923 |   | $ | 194,759 |   | $ | 194,759 |   |
|                           |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Carole Artman-Hodge:**       |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash severance payment         |       | $                                                                           | 1,183,500  |   | $ | 13,500 |   | $ | 13,500 |   | $ | 13,500 |   | $ | 13,500 |   |
| Total termination benefits     |       | $                                                                           | 1,183,500  |   | $ | 13,500 |   | $ | 13,500 |   | $ | 13,500 |   | $ | 13,500 |   |
|                           |       |                                                                        |       |   |   |   |   |   |   |   |   |
| **Robert Werner:**             |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cash severance payment         |       | $                                                                           | 284,187    |   | $ | 3,365 |   | $ | 3,365 |   | $ | 3,365 |   | $ | 3,365 |   |
| Total Termination benefits     |       | $                                                                           | 284,187    |   | $ | 3,365 |   | $ | 3,365 |   | $ | 3,365 |   | $ | 3,365 |   |

 

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**DirectorCompensation**

 

Forthe fiscal year ended June 30, 2008, we did not pay any retainer, committeemembership or committee chairman fees to any of our directors as compensationfor their membership on our Board of Directors. In addition, we do not provide any defined benefit or definedcontribution plan benefits to any of our directors.  During the fiscal year ended June 30,2008, 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.

 

In October 2008, our Board of Directors approvedthe following fees payable to Michael Hamilton 2008: (1) $40,000 annuallyfor his membership and participation on the Board of Directors, effectiveretroactively to April 1, 2008 and (2) $10,000 annually for his roleas Chairman of the Audit Committee, effective July 1, 2008.

 

Director Compensation earned or paid during fiscal year2008 is summarized in the following table.

 
| ** **           | ** ** | **Fees Earned or  Paid in Cash (1)** | ** ** |
|----------------------|------------|---------------------------------------------------------------|------------|
| ** **           | ** ** | ** **                                                    | ** ** |
| **Michael Hamilton** |       | $                                                             | 10,000     |   |
|                      |            |                                                               |            |  |

 

During the fiscal year ended June 30, 2008, DanielBergstein provided management consulting services to the Company, for which werecorded $260,000 of expense during the year. Refer to “Item 13.  CertainRelationships and Related Transactions and Director Independence” foradditional information.

 

**CompensationCommittee Interlocks and Insider Participation**

 

Thefollowing directors served on the Compensation Committee during the fiscal yearended June 30, 2008: Messrs. Daniel Bergstein (Chair), WilliamLanduyt and Stuart Porter.  Messrs. Bergstein,Landuyt and Porter were not, during fiscal year 2008 or previously, officers oremployees of Holdings.  The Board ofDirectors has determined that Messrs. Bergstein and Landuyt were notindependent directors based on the definition of independence of the New YorkStock Exchange.  For more information,refer to “Item 13. Certain Relationships and Related Transactions, andDirector Independence — Independence of Directors.”  During the fiscal year ended June 30,2008, we had no Compensation Committee “interlocks”, meaning that no executiveofficer of the Company served as a director or member of the CompensationCommittee of another entity of which an executive officer served as a directoror a member of the Compensation Committee of the Company.

 

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**ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**

 

The following table setsforth, as of August 31, 2008, information with respect to shares of commonstock beneficially owned by: (1) each of the named executive officers; (2) eachdirector; (3) all executive officers and directors as a group; and (4) eachperson known to be the beneficial owner of more than five percent of ouroutstanding 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.

 
| ** **                                                                                                                                                    | ** ** | **Common Stock (1)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| **Name or Description**                                                                                                                             | ** ** | **Number**                     | ** ** | **Percentage  of Class** | ** ** |
|                                                                                                                                                          |       |                           |       |   |   |
| **Executive Officers and Directors:**                                                                                                                         |       |                           |       |   |   |
| Jeffrey Mayer (2)                                                                                                                                             |       | 735,361                        |       | 15.2 | % |
| Chaitu Parikh (3)                                                                                                                                             |       | 112,975                        |       | 2.3 |   |
| Steven Murray (4)                                                                                                                                             |       | 50,000                         |       | 1.0 |   |
| Carole R. (“Robi”) Artman-Hodge (5)                                                                                                                 |       | 443,565                        |       | 9.2 |   |
| Robert Werner (6)                                                                                                                                             |       | 33,333                         |       | 0.7 |   |
| Daniel Bergstein (7)                                                                                                                                          |       | 344,613                        |       | 7.2 |   |
| John Stewart (8)                                                                                                                                              |       | 65,641                         |       | 1.4 |   |
| William Landuyt (9)                                                                                                                                           |       | 1,274,931                      |       | 21.4 |   |
| Stuart Porter (10)                                                                                                                                            |       | 2,  427,151                    |       | 51.3 |   |
| Michael J. Hamilton                                                                                                                                           |       | —                         |       | — |   |
| All directors and executive officers as a group (12 persons)  (11)                                                                                       |       | 5,590,670                      |       | 86.5 |   |
| **5% Stockholders:**                                                                                                                                          |       |                           |       |   |   |
| Denham Commodity Partners Fund LP (10)  200 Clarendon Street, 25th Floor, Boston, MA 02116                                                                    |       | 2,427,151                      |       | 51.3 |   |
| Charter Mx LLC (9)  1105 Market Street, Suite 1300, Wilmington, DE 19899                                                                                 |       | 1,274,931                      |       | 21.4 |   |
| Greenhill Capital Partners, L.P. and its affiliated funds (12)  300 Park Avenue, 23rd Floor, New York, NY 10022                                               |       | 245,179                        |       | 4.9 |   |
| Pequot Enterprises LLC (13)  26 Pequot Trail, Westport, CT 06880                                                                                              |       | 594,000                        |       | 12.5 |   |
| JED Communications Associates, Inc. (14)  c/o Paul, Hastings, Janofsky & Walker LLP, 75 E. 55th  Street, New York, NY 10022 |       | 320,313                        |       | 6.8 |   |
| Carole R. Artman Hodge 2005 7 Yr. GRAT (15)  c/o Carole R. Artman Hodge, 61 Rye Road, Rye, NY 10580                                            |       | 285,514                        |       | 6.0 |   |

 

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| (1) |   | The percentage of beneficial ownership is based on 3,604,788 shares of  our common stock outstanding as of August 31, 2008, plus 1,130,163  shares of common stock issued within 60 days subsequent to August 31,  2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Includes: (1) 98,550 shares of our common stock issuable upon the  exercise of stock options that are either currently exercisable or are  expected to become exercisable during the 60 days subsequent to  August 31, 2008; and (2) 594,000 shares of common stock held by  Pequot Enterprises LLC, a limited liability company owned 23% by  Mr. Mayer and for which Mr. Mayer, as manager, has both voting and  disposition power. Does not include 26,000 shares of our common stock  issuable upon the exercise of options that are currently not exercisable and  will not become exercisable within the 60 days subsequent to August 31,  2008. |
| (3) |   | Includes 92,200 shares of our common stock issuable upon the exercise  of stock options that are either currently exercisable or expected to become  exercisable during the 60 days subsequent to August 31, 2008. Does not  include 26,000 shares of our common stock issuable upon the exercise of  options that are currently not exercisable and will not become exercisable  within the 60 days subsequent to August 31, 2008.                                                                                                                                                                                                                                   |
| (4) |   | Includes 50,000 shares of our common stock issuable upon the  exercise of stock options that are either currently exercisable or expected  to become exercisable during the 60 days subsequent to August 31, 2008.  Does not include 100,000 shares of our common stock issuable upon the  exercise of options that are currently not exercisable and will not become  exercisable within the 60 days subsequent to August 31, 2008.                                                                                                                                                                                                                                  |
| (5) |   | Includes: (1) 98,550 shares of our common stock issuable upon the  exercise of stock options that are either currently exercisable or expected  to become exercisable during the 60 days subsequent to August 31, 2008;  and (2)  285,514 shares of our common stock owned by the Carole R.  Artman-Hodge 2005 7 Yr. GRAT for which Ms. Artman-Hodge has both voting  and disposition power. Does not include 26,000 shares of our common stock  issuable upon the exercise of options that are currently not exercisable and  will not become exercisable within the 60 days subsequent to August 31,  2008.                                                    |

 

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| (6)  |   | Includes 16,667 shares of our common stock issuable upon the  exercise of stock options that are either currently exercisable or expected  to become exercisable during the 60 days subsequent to August 31, 2008.  Does not include 33,333 shares of our common stock issuable upon the  exercise of options that are currently not exercisable and will not become  exercisable within the 60 days subsequent to August 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (7)  |   | Includes: (1) 21,800 shares of our common stock issuable upon the  exercise of stock options that are either currently exercisable or are  expected to become exercisable during the 60 days subsequent to  August 31, 2008; and (2) 320,313 shares of our common stock owned  by JED Communications Associates, Inc., a corporation 100% owned by  Mr. Bergstein and members of his immediate family.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (8)  |   | Includes: (1) 12,800 shares of our common stock issuable upon the  exercise of stock options that are either currently exercisable or are  expected to become exercisable during the 60 days subsequent to  August 31, 2008; (2) 42,341 shares of our common stock held by the  Stewart Family Trust, of which Mr. Stewart is the beneficiary, and for  which Mr. Stewart may be deemed to have beneficial ownership;  (3) 2,500 shares of our common stock held in an IRA for Mr. Stewart  for which he has both voting and disposition power; (4) 3,000 shares of  our common stock held by Mr. Stewart’s spouse, for which  Mr. Stewart may be deemed to have indirect beneficial ownership; and  (5) 2,500 shares of our common stock held in an IRA account belonging to  Mr. Stewart’s spouse, for which Mr. Stewart may be deemed to have  indirect beneficial ownership. Mr. Stewart disclaims beneficial  ownership of the shares held by his spouse and by his spouse’s IRA account  except to the extent of his pecuniary interest therein. Does not include  1,000 shares of our common stock issuable upon the exercise of options that  are currently not exercisable and will not become exercisable within the 60  days subsequent to August 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (9)  |   | Includes  shares of our common stock issuable upon the conversion of 1,217,228 shares  of Preferred Stock. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (10) |   | Includes 1,130,163 shares of our common stock issued upon the exercise  of warrants in September 2008. The shares of our 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (11) |   | Represents beneficial ownership as a group for all directors and  executive officers as listed in the table under “Item 10. Directors,  Executive Officers and Corporate Governance — Directors and Executive  Officers.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (12) |   | Includes: (1) 6,848 shares of our common stock held by Greenhill  Capital Partners, L.P.; (2) 978 shares of our common stock held by  Greenhill Capital Partners (Cayman), L.P.; (3) 1,081 shares of our  common stock held by Greenhill Capital Partners (Executives), L.P.;  (4) 2,190 shares of our common stock held by Greenhill Capital, L.P.;  (5) 144,440 shares of our common stock issuable upon the conversion of  144,440 shares of our Preferred Stock held by Greenhill Capital Partners,  L.P.; (6) 20,639 shares of our common stock issuable upon the conversion  of 20,639 shares of our Preferred Stock held by Greenhill Capital Partners  (Cayman), L.P.; (7) 22,797 shares of our common stock issuable upon the  conversion of 22,797 shares of our Preferred Stock held by Greenhill Capital  Partners (Executives), L.P.; and (8) 46,206 shares of our common stock  issuable upon the conversion of 46,206 shares of our redeemable convertible  preferred stock held by Greenhill Capital, L.P. GCP Managing Partner, L.P.,  the managing general partner of Greenhill Capital Partners, L.P., Greenhill  Capital Partners (Cayman), L.P., Greenhill Capital Partners (Executives),  L.P. and Greenhill Capital, L.P. (the “Funds”), as well as Greenhill Capital  Partners, LLC, which controls the managing general partner, and  Greenhill & Co., Inc., the sole member of Greenhill Capital  Partners, LLC, may be deemed to beneficially own the shares held by the Funds.  We have been advised by the Funds that all decisions regarding investments by  the Funds are made by an investment committee whose composition may change.  No individual has authority to make any such decisions without the approval  of the Funds’ investment committee. The current members of the investment  committee are Robert H. Niehaus, Scott L. Bok, Robert F. Greenhill, Simon A.  Borrows, Kevin Bousquette and V. Frank Pottow, each of whom disclaims  beneficial ownership in the shares held by the Funds except to the extent of  his pecuniary interest therein. |
| (13) |   | Pequot Enterprises LLC is a limited liability company owned 23% by  Jeffrey Mayer and for which Mr. Mayer, as manager, has both voting and  disposition power.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (14) |   | JED Communications Associates, Inc. is a corporation owned 100%  by Daniel Bergstein and members of his immediate family and for which  Mr. Bergstein has both voting and disposition power.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (15) |   | The Carole R. Artman-Hodge 2005 7 Yr. GRAT is a grantor retained  annuity trust of which Carole R. “Robi” Artman-Hodge is the beneficiary and  the trustee and for which Ms. Artman-Hodge has both voting and  disposition power.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

OurCode of Business Conduct and Ethics, which is posted on our website at www.mxholdings.com,prohibits directors and executive officers from engaging in transactions onbehalf of the Company with a family member, or with a company with which theyor any family member are a significant owner or associated or employed in asignificant role.  Our Audit Committeemust review and approve in advance all related party transactions orbusiness or professional relationships. All instances involving potential related party transactions or businessor professional relationships must be reported to the Company’s AssociateGeneral Counsel, who is responsible to assess the materiality of thetransaction or relationship and elevate the matter to the Audit Committee asappropriate.

 

**Stockholders’ Agreement**

 

Wehave entered into a Third Amended and Restated Stockholders’ Agreement withholders of our common stock and Preferred Stock. The stockholders’ agreementcontains, 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 have, subject to certain exceptions,preemptive rights on future offerings of equity securities by us. In addition,if we issue or sell 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.

 

Pursuantto the stockholders’ agreement, the consent of Jeffrey Mayer and the holders of10% of more of our common stock on a fully diluted basis are required forvarious transactions including our liquidation, dissolution, merger, sale ofall or substantially all of our assets as well as the issuance of oursecurities in connection with certain acquisitions and joint ventures. Theconsent of our Board of Directors (including the consent of the directorappointed by the holders of our outstanding Preferred Stock) is required forcertain actions, including our incurrence of debt in excess of $2.0 million.

 

**Denham Credit Facility**

 

Denhamis a significant stockholder of the Company. Denham has extended a $12.0 million line of credit to the Company, whichbears interest at 9% per annum.  Thetermination date of the Denham Credit Facility is May 19, 2010, at whichtime any outstanding principal balance becomes due.  The Company had $0 and $11.0 million ofborrowings outstanding under the Denham Credit Facility at June 30, 2008and 2007, respectively.  In December 2007,the agreement governing the Denham Credit Facility was amended to allow theCompany to draw principal until November 14, 2008.  In January 2008, the Company repaid theentire $11.0 million principal balance outstanding under the Denham CreditFacility.  Interest expense related tothe Denham Credit Facility was $0.5 million for the fiscal year ended June 30,2008.  Stuart Porter, a principal ofDenham Capital Management LP and Chief Investment Officer for the DenhamCommodity Partners Fund, is a director of Holdings.

 

Webelieve that the terms of the Denham Credit Facility are comparable to those wewould have received in a similar transaction with an unrelated third party.

 

**Legal Services**

 

DanielBergstein, a director of Holdings and significant stockholder of the Company,is a senior partner of Paul, Hastings, Janofsky & Walker LLP a lawfirm that provides legal services to the Company.  During the fiscal year ended June 30,2008,  Paul Hastings provided the Companywith legal services totaling $0.6 million. The Company expects that Paul Hastings will continue to provide legalservices to the Company in future periods.

 

Webelieve that the legal services provided to us by Paul Hastings were on termsthat were comparable to those that Paul Hastings provides to their otherclients.

 

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**Financial Advisory Services**

 

InMay 2007, the Company entered into a financial advisory services agreementwith Greenhill & Co., LLC, an affiliate of GCP, pursuant to which theCompany pays Greenhill & Co., LLC quarterly retainer fees that total$0.3 million annually, and may incur other charges based on the occurrenceof a transaction, as defined in such agreement. The Company paid approximately $0.3 million to Greenhill & Co., LLCduring the fiscal year ended June 30, 2008 related to this agreement.

 

Webelieve that these financial advisory services were provided on termscomparable to those we would have received in a similar transaction with anunrelated third party.

 

**ManagementFees**

 

Effective for the three months ended September 30,2007, the Company agreed to pay Denham, Daniel Bergstein and Charter Mx LLC,another significant stockholder of the Company, an aggregate annual fee of $0.9million, payable in equal quarterly amounts, for management consulting servicesprovided to the Company.  Stuart Porter,a principal of Denham Capital Management LP and Chief Investment Officer forDenham Commodity Partners Fund, is a director of Holdings.  Daniel Bergstein is a director of Holdingsand a significant stockholder of the Company. William Landuyt, a Senior Partner of Charterhouse Group, Inc., anaffiliate of Charter Mx LLC, is a director of Holdings.

 

**Options and Warrants Issued to Related Parties**

 

Therewere no options or warrants to purchase the Company’s common stock granted toor exercised by any related parties during fiscal year 2008.  In September 2008, Denham exercised1,544,736 warrants to purchase common stock with a weighted average exerciseprice of $9.79 per share.  The cashlesstransaction resulted in issuance of 1,130,163 shares of the Company’s commonstock.

 

**Independence of Directors**

 

TheCompany is a closely held corporation and does not have a class of equitysecurities listed on a national securities exchange.  The Company has adopted the definition ofindependence of the New York Stock Exchange. However, because our securities are not listed on a national securitiesexchange, none of our directors are required to qualify as an independentdirector.

 

TheBoard of Directors has determined that under such standard, John Stewart andMichael J. Hamilton are independent directors. None of Messrs. Mayer or Murray or Ms. Artman-Hodge isindependent because they are currently employed by the Company.  Stuart Porter is not an independent directoras a result of his affiliation with Denham, a significant stockholder of theCompany. Daniel Bergstein is not an independent director because: (1) heis a partner in the New York office of Paul, Hastings, Janofsky &Walker LLP, a law firm that performs substantial legal services to the Companyon a regular basis; and (2) in June 2004, he received a finder’s feein connection with our issuance of Preferred Stock.  William Landuyt is not an independentdirector as a result of his affiliation with Charterhouse, a significantstockholder of the Company.

 

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**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Thetotal fees and expenses for professional services provided by our independentregistered public accounting firm, Ernst & Young LLP, for the fiscalyears ended June 30, 2008 and 2007 are presented in the table below:

 
| ** ** | ** ** | **Year ended June 30,** | ** ** |
|------------|------------|----------------------------------------|------------|
| ** ** | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| ** ** | ** ** | **(in thousands)**                | ** ** |
| Audit fees |       | $                                      | 1,596      |   | $ | 2,321 |   |
| Tax fees   |       | 38                                     |       | 29 |   |
| Total      |       | $                                      | 1,634      |   | $ | 2,350 |   |

 

AuditFees consist primarily of: (1) fees billed for the audit of theconsolidated financial statements and review of other financial informationincluded in our Annual Report on Form 10-K for fiscal years 2008 and 2007;(2) reviews of our Quarterly Reports on Form 10-Q; (3) review ofour compliance with new U.S. GAAP pronouncements, including SEC regulations;and (4) review our accounting and reporting methodology for certainspecific transactions.

 

TaxFees consist of fees for tax compliance, tax advice and tax planning.

 

TheAudit Committee has the responsibility to consider the compatibility ofnon-audit services provided by its independent auditors with maintaining theauditors’ independence.  There were nosuch non-audit services performed by the independent auditors during the fiscalyears ended June 30, 2008 or 2007. 

 

**Pre-Approval Policy**

 

Theservices performed by the independent registered public accounting firm duringthe fiscal year ended June 30, 2008 were pre-approved by the AuditCommittee, in accordance with the Audit Committee’s independent auditorpre-approval policy.  This policydescribes the permitted audit, audit-related and tax services (collectively,referred to as the disclosure categories) that the independent registeredpublic accounting firm may perform up to a pre-determined dollar limit perproject. The policy requires a description of the material services (referredto as the standard services list) expected to be performed by the independentregistered public accounting firm in each of the disclosure categoriespresented to the audit committee for approval.

 

Anyrequests for audit, audit-related and tax services not contemplated on thestandard services list or exceeding the pre-determined dollar limit per projectmust be submitted to the Audit Committee for specific pre-approval and cannotcommence until such approval has been granted. Normally, pre-approval is provided on an informal, as-needed basis.  The Audit Committee may delegate pre-approvalauthority to one of its members, who shall initially be the chairman of theAudit Committee.  The decisions of anyAudit Committee member to whom pre-approval authority is delegated must bepresented to the full Audit Committee at its next scheduled meeting.

 

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**PART IV**

 

**ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

Thefollowing documents are filed as part of this Annual Report:

 
| (1) |   | Financial  Statements.  See Index to Financial  Statements under “Item 8. Financial Statements and Supplementary Data.”                                                                                                                                      |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Financial  Statement Schedules.  Schedules are  omitted as the required information is inapplicable or the information is  presented in the consolidated financial statements or related notes under  “Item 8. Financial Statements and Supplementary Data.” |
| (3) |   | Exhibits. The exhibits filed as part of this Annual Report are listed  in the exhibit index immediately preceding such exhibits.  Such index is incorporated herein by  reference.                                                                                     |

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                         |     | MXENERGY  HOLDINGS INC. |
|------------------------------|----------|------------------------------|
|                         |     |                         |   |
| Date:  October 14, 2008 |     |                         |   |
|                         |     | By:                          | /s/ JEFFREY A. MAYER |   |
|                         |     |                         | Jeffrey A. Mayer |   |
| * *                     | * * | * *                     | *President and Chief Executive Officer* |   |

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 
| **Signatures**             | ** ** | **Title**                                  | ** ** | **Date**         |
|----------------------------|------------|--------------------------------------------|------------|------------------|
|                       |       |                                       |       |             |
| /s/ JEFFREY A. MAYER       |       | Director,  President and Chief Executive   |       | October 14, 2008 |
| Jeffrey A. Mayer           |       | Officer (Principal Executive Officer)      |       |
|                       |       |                                       |       |             |
|                       |       |                                       |       |             |
| /s/ CHAITU PARIKH          |       | Vice  President of Finance and Chief       |       |             |
| Chaitu Parikh              |       | Financial  Officer (Principal Financial    |       | October 14, 2008 |
|                       |       | Officer  and Principal Accounting Officer) |       |
|                       |       |                                       |       |             |
| /s/ STEVEN MURRAY          |       | Director                                   |       | October 14, 2008 |
| Steven Murray              |       |                                       |       |             |
|                       |       |                                       |       |             |
| /s/ CAROLE R. ARTMAN-HODGE |       | Director                                   |       | October 14, 2008 |
| Carole R. Artman-Hodge     |       |                                       |       |             |
|                       |       |                                       |       |             |
| /s/ DANIEL BERGSTEIN       |       | Director                                   |       | October 14, 2008 |
| Daniel Bergstein           |       |                                       |       |             |
|                       |       |                                       |       |             |
| /s/ MICHAEL J. HAMILTON    |       | Director                                   |       | October 14, 2008 |
| Michael J. Hamilton        |       |                                       |       |             |
|                       |       |                                       |       |             |
| /s/ WILLIAM LANDUYT        |       | Director                                   |       | October 14, 2008 |
| William Landuyt            |       |                                       |       |             |
|                       |       |                                       |       |             |
| /s/ STUART PORTER          |       | Director                                   |       | October 14, 2008 |
| Stuart Porter              |       |                                       |       |             |
|                       |       |                                       |       |             |
| /s/ JOHN STEWART           |       | Director                                   |       | October 14, 2008 |
| John Stewart               |       |                                       |       |             |

 

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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                 |       | Amended  and Restated Certificate of Incorporation of MXenergy Holdings Inc. (1)                                                                                                                                                                                                                                                                                                  |
| 3.2                 |       | Second  Amended and Restated Bylaws of MXenergy Holdings Inc. (5)                                                                                                                                                                                                                                                                                                                 |
| 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 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                 |       | Form of  Senior Floating Rate Note due 2011 (included in Exhibit 4.1) (1)                                                                                                                                                                                                                                                                                               |
| 4.4                 |       | 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)                                                                                                                                   |
| 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. (8)                                                                                                                |
| 10.6                |       | 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)                                                                                                       |
| 10.7                |       | 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)                                                                                                     |
| 10.8                |       | 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)                                                                                                                                              |
| 10.9                |       | 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)                                                                                                                                          |
| 10.10               |       | 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)                                                                                                                        |
| 10.11               |       | 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)                                                 |
| 10.12               |       | 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)                                                    |
| 10.13               |       | 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)                                                                                                                                                                                                          |

 

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| 10.14 |   | 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)                                            |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15 |   | Amendment  No. 1 to Subordination and Intercreditor Agreement, dated as of  August 1, 2006, 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)                                                                                              |
| 10.16 |   | 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)                                                                                                                                                                                                                                                  |
| 10.17 |   | 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)                                                                                                                                                                                                                                |
| 10.18 |   | 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)                                                                                                                                                                                                                           |
| 10.19 |   | Third  Amendment to Master Transaction Agreement, dated as of May 12, 2008, by  and among MXenergy, Inc. MXenergy Holdings, Inc, and certain  subsidiaries thereof, as guarantors, and Société Générale (6)                                                                                                                                                                                                                           |
| 10.20 |   | Fourth  Amendment to Master Transaction Agreement, dated as of July 31, 2008, by  and among MXenergy, Inc. MXenergy Holdings, Inc, and certain  subsidiaries thereof, as guarantors, and Société Générale (7)                                                                                                                                                                                                                         |
| 10.21 |   | 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 *                                                                                                                                                                                                                                 |
| 10.22 |   | 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)                                                                                              |
| 10.23 |   | 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 *                                                                           |
| 10.24 |   | 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) |
| 10.25 |   | Transition  Services Agreement, dated as of August 1, 2006, by and between MXenergy  Inc. and Shell Energy Services Company L.L.C. (1)                                                                                                                                                                                                                                                                                                                         |
| 10.26 |   | Employment  Agreement, dated as of April 1, 1999, by and between MXenergy Inc. and  Jeffrey Mayer (1)                                                                                                                                                                                                                                                                                                                                                          |
| 10.27 |   | Employment  Agreement, dated as of February 13, 2008, by and between MXenergy Inc.  and Jeffrey Mayer (5)                                                                                                                                                                                                                                                                                                                                                      |
| 10.28 |   | Employment  Agreement, dated as of August 4, 2006, by and between MXenergy Inc. and  Steven Murray (1)                                                                                                                                                                                                                                                                                                                                                         |
| 10.29 |   | Employment  Agreement, dated as of April 1, 1999, by and between MXenergy Inc. and  Carole R. (“Robi”) Artman- Hodge (1)                                                                                                                                                                                                                                                                                                                             |
| 10.30 |   | Employment  Agreement, dated as of November 11, 2002, by and between MXenergy Inc.  and Chaitu Parikh (1)                                                                                                                                                                                                                                                                                                                                                      |
| 10.31 |   | Employment  Agreement, dated as of February 13, 2008, by and between MXenergy Inc.  and Chaitu Parikh (5)                                                                                                                                                                                                                                                                                                                                                      |
| 10.32 |   | Employment  Agreement, dated as of May 1, 2000, by and between MXenergy Inc. and  Emmett Capanna (1)                                                                                                                                                                                                                                                                                                                                                           |
| 10.33 |   | Employment  Agreement, dated as of December 24, 2004, by and between MXenergy Inc.  and Thomas Hartmann (1)                                                                                                                                                                                                                                                                                                                                                    |
| 10.34 |   | Employment  Agreement, dated as of June 13, 2007, by and between MXenergy Inc. and  Gina Goldberg (4)                                                                                                                                                                                                                                                                                                                                                          |
| 10.35 |   | Employment  Agreement, dated as of August 14, 2006, by and between MXenergy Inc. and  Robert Werner (4)                                                                                                                                                                                                                                                                                                                                                        |
| 10.36 |   | 2001  Stock Option Plan, as amended (1)                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.37 |   | 2003  Stock Option Plan, as amended (1)                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.38 |   | 2006  Equity Incentive Compensation Plan (1)                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.39 |   | Form of  Award Agreement under 2001 Stock Option Plan (1)                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.40 |   | Form of  Award Agreement under 2003 Stock Option Plan (1)                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.41 |   | Form of  Stock Option Award Agreement under 2006 Equity Incentive Compensation Plan  (1)                                                                                                                                                                                                                                                                                                                                                                       |
| 10.42 |   | Financial  Advisory Agreement, dated as of May 1, 2007, by and between MXenergy  Inc. and Greenhill & Co., LLC (1)                                                                                                                                                                                                                                                                                                                                    |
| 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

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| (7)    |   | Incorporated  by reference to the Company’s Current Report on Form 8-K filed on  August 1, 2008. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                            |
| (8)    |   | Incorporated  by reference to the Company’s Current Report on Form 8-K filed on  October 2, 2008.     |

 

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