##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from            to
 Commission File Number 001-32239
 COMMERCE ENERGY GROUP, INC.
 (Exact name of registrant as specified in its charter)
 
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    20-0501090(I.R.S. Employer
Identification No.)600 Anton Boulevard, Suite 2000, 
Costa Mesa, California(Address of principal executive offices)
    
    92626(Zip
Code)
 (714) 259-2500  (Registrants telephone number, including area code)
 Not Applicable  (Former name, former address and former fiscal year, if changed since last report)
 þ o
  Large Accelerated Filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




---



##### 



COMMERCE ENERGY GROUP, INC.
 Form 10-Q
 For the Period Ended January 31, 2007
 Index
 PagePart I 
    
    Financial Information
    
    
    1Item 1.
    
    Financial Statements:Condensed Consolidated Statements of Operations for the three and six months ended January 31, 2007 and 2006
    
    
    1Condensed Consolidated Balance Sheets as of January 31, 2007 and July 31, 2006
    
    
    2Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2007 and 2006
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21Part II 
    
    Other Information
    
    
    22Item 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3.
    
    Defaults Upon Senior Securities
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 5.
    
    Other Information
    
    
    23Item 6.
    
    Exhibits
    
    
    25Signatures
    
    
    
    
    27EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.9EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 COMMERCE ENERGY GROUP, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJanuary 31,
    
    
    January 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenue
    
    $
    92,644
    
    
    $
    72,654
    
    
    $
    163,152
    
    
    $
    137,022Direct energy costs
    
    
    78,112
    
    
    
    68,892
    
    
    
    138,563
    
    
    
    125,020Gross profit
    
    
    14,532
    
    
    
    3,762
    
    
    
    24,589
    
    
    
    12,002Selling and marketing expenses
    
    
    2,607
    
    
    
    1,228
    
    
    
    4,845
    
    
    
    1,926General and administrative expenses
    
    
    9,637
    
    
    
    6,847
    
    
    
    17,484
    
    
    
    14,456Income (loss) from operations
    
    
    2,288
    
    
    
    (4,313
    )
    
    
    2,260
    
    
    
    (4,380
    )Other income and expenses:Interest income, net
    
    
    251
    
    
    
    201
    
    
    
    662
    
    
    
    488Net income (loss)
    
    $
    2,539
    
    
    $
    (4,112
    )
    
    $
    2,922
    
    
    $
    (3,892
    )Income (loss) per common share:Basic and diluted
    
    $
    0.09
    
    
    $
    (0.13
    )
    
    $
    0.10
    
    
    $
    (0.13
    )
  1




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##### Table of Contents



COMMERCE ENERGY GROUP, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
 January 31, 2007
    
    
    July 31, 2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,292
    
    
    $
    22,941Accounts receivable, net
    
    
    52,369
    
    
    
    30,650Natural gas inventory
    
    
    3,960
    
    
    
    4,578Prepaid expenses and other current
    
    
    4,586
    
    
    
    6,827Total current assets
    
    
    68,207
    
    
    
    64,996Restricted cash and cash equivalent
    
    
    10,595
    
    
    
    17,117Deposits
    
    
    1,365
    
    
    
    2,506Property and equipment, net
    
    
    7,474
    
    
    
    5,866Goodwill
    
    
    4,247
    
    
    
    4,801Other intangible assets, net
    
    
    7,041
    
    
    
    3,790Total assets
    
    $
    98,929
    
    
    $
    99,076LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    24,728
    
    
    $
    26,876Accrued liabilities
    
    
    7,409
    
    
    
    5,867Total current liabilities
    
    
    32,137
    
    
    
    32,743Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock  150,000 shares authorized with
$0.001 par value; 29,632 shares issued and
outstanding at July 31, 2006 and 29,762
(unaudited) at January 31, 2007
    
    
    59,114
    
    
    
    58,849Accumulated other comprehensive income (loss)
    
    
    (457
    )
    
    
    2,271Retained earnings
    
    
    8,135
    
    
    
    5,213Total stockholders equity
    
    
    66,792
    
    
    
    66,333Total liabilities and stockholders equity
    
    $
    98,929
    
    
    $
    99,076
  2




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COMMERCE ENERGY GROUP, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedJanuary 31,2007
    
    
    2006Cash Flows From Operating ActivitiesNet income (loss)
    
    $
    2,922
    
    
    $
    (3,892
    )Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation
    
    
    714
    
    
    
    544Amortization
    
    
    1,008
    
    
    
    553Provision for doubtful accounts
    
    
    2,200
    
    
    
    1,708Stock-based compensation expense
    
    
    266
    
    
    
    340Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (23,918
    )
    
    
    (11,976
    )Inventory
    
    
    617
    
    
    
    482Prepaid expenses and other current assets
    
    
    1,303
    
    
    
    (3,471
    )Accounts payable
    
    
    (2,147
    )
    
    
    (2,395
    )Accrued liabilities and other
    
    
    630
    
    
    
    3,998Net cash used in operating activities
    
    
    (16,405
    )
    
    
    (14,109
    )Cash Flows From Investing ActivitiesPurchase of property and equipment
    
    
    (2,322
    )
    
    
    (1,394
    )Purchase of intangible assets
    
    
    (4,217
    )
    
    
    Sale of intangibles  customer contracts sold
    
    
    756
    
    
    
    Net cash used in investing activities
    
    
    (5,783
    )
    
    
    (1,394
    )Cash Flows From Financing ActivitiesCredit line commitment fee
    
    
    17
    
    
    
    Repurchase of stock
    
    
    
    
    
    
    (2,204
    )Decrease (increase) in restricted cash
    
    
    6,522
    
    
    
    (2,257
    )Net cash provided by (used in) financing activities
    
    
    6,539
    
    
    
    (4,461
    )Decrease in cash and cash equivalents
    
    
    (15,649
    )
    
    
    (19,964
    )Cash and cash equivalents at beginning of period
    
    
    22,941
    
    
    
    33,344Cash and cash equivalents at end of period
    
    $
    7,292
    
    
    $
    13,380
  3




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COMMERCE ENERGY GROUP, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
 Note 1. Summary of Significant Accounting Policies
 Basis of Presentation
  Preparation of Interim Condensed Consolidated Financial Statements
  Uses of Estimates
  Reclassifications
  Revenue Recognition
  Three Months Ended
    
    
    Six Months EndedJanuary 31,
    
    
    January 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Retail electricity sales
    
    $
    50,711
    
    
    $
    44,352
    
    
    $
    104,118
    
    
    $
    94,442Excess electricity sales
    
    
    99
    
    
    
    1,540
    
    
    
    1,535
    
    
    
    6,889Total electricity sales
    
    
    50,810
    
    
    
    45,892
    
    
    
    105,653
    
    
    
    101,331Retail natural gas sales
    
    
    41,834
    
    
    
    26,762
    
    
    
    57,499
    
    
    
    35,691Net revenue
    
    $
    92,644
    
    
    $
    72,654
    
    
    $
    163,152
    
    
    $
    137,022
  4




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##### Table of Contents



COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
 Stock-Based Compensation
   Six Months EndedJanuary 31,2007
    
    
    2006Weighted-average risk-free interest rate
    
    
    4.8
    %
    
    
    4.1
    %Average expected life in years
    
    
    4.44
    
    
    
    5.28Expected dividends
    
    None
    
    NoneExpected volatility
    
    
    0.73
    
    
    
    0.78
  Options OutstandingWeightedNumber of
    
    
    
    
    
    
    Average
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    Exercise
    
    
    Intrinsic(in Thousands)
    
    
    Per Share
    
    
    Price
    
    
    ValueOptions outstanding as of October 31, 2006
    
    
    7,743
    
    
    $
    1.00-$3.75
    
    
    $
    2.32Options cancelled
    
    
    100
    
    
    $
    2.50-$3.75
    
    
    $
    2.51Options outstanding as of January 31, 2007 (1)
    
    
    7,643
    
    
    $
    1.00-$3.75
    
    
    $
    2.32
    
    
    $
    50
 (1)
    
    Options exercisable as of January 31, 2007 were 7,413 with weighted average
exercise price of $2.34 and an aggregate intrinsic value of $50.
  Employee Stock Purchase and Stock Incentive Plans
   5




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COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
  Income Tax
  Comprehensive Income (Loss)
   Three Months Ended
    
    
    Six Months EndedJanuary 31,
    
    
    January 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    2,539
    
    
    $
    (4,112
    )
    
    $
    2,922
    
    
    $
    (3,892
    )Changes in fair value of cash flow hedges
    
    
    (131
    )
    
    
    (845
    )
    
    
    (2,728
    )
    
    
    (1,022
    )Comprehensive income (loss)
    
    $
    2,408
    
    
    $
    (4,957
    )
    
    $
    194
    
    
    $
    (4,914
    )
  Segment Reporting
  Accounts Receivable, Net
  January 31,
    
    
    July 31,2007
    
    
    2006Billed
    
    $
    37,411
    
    
    $
    21,768Unbilled
    
    
    18,613
    
    
    
    13,382$
    56,024
    
    
    $
    35,150Less allowance for doubtful accounts
    
    
    (3,655
    )
    
    
    (4,500
    )Accounts receivable, net
    
    $
    52,369
    
    
    $
    30,650
 Inventory
  6




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##### Table of Contents



COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
 Note 2. Basic and Diluted Income (Loss) per Common Share
   Three Months Ended
    
    
    Six Months EndedJanuary 31,
    
    
    January 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income (loss)
    
    $
    2,539
    
    
    $
    (4,112
    )
    
    $
    2,922
    
    
    $
    (3,892
    )Net income (loss) applicable to common stock basic and diluted
    
    $
    2,539
    
    
    $
    (4,112
    )
    
    $
    2,922
    
    
    $
    (3,892
    )Denominator:Weighted-average outstanding common shares  basic
    
    
    29,687
    
    
    
    30,464
    
    
    
    29,663
    
    
    
    30,881Effect of stock options
    
    
    34
    
    
    
    
    
    
    
    30
    
    
    
    Weighted-average outstanding common shares  diluted
    
    
    29,721
    
    
    
    30,464
    
    
    
    29,693
    
    
    
    30,881
 Note 3. Market and Regulatory
    7




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##### Table of Contents



COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
    Note 4. HESCO Customer Acquisition
  Note 5. Contingencies
 APX Settlement
     8




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COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
  ACN Arbitration
    Note 6. Derivative Financial Instruments
   9




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##### Table of Contents



COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
  January 31,
    
    
    July 31,2007
    
    
    2006Current assets
    
    $
    
    
    
    $
    1,817Current liabilities
    
    
    (823
    )
    
    
    (362
    )Deferred gains
    
    
    155
    
    
    
    816Hedge ineffectiveness
    
    
    211
    
    
    
    Accumulated other comprehensive income (loss)
    
    $
    (457
    )
    
    $
    2,271
   Note 7. Credit Facility
    10




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    Our Company
    11




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##### Table of Contents



Significant Customer Acquisitions
 ACN Energy Acquisition
  HESCO Acquisition
  Market and Regulatory
    12




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##### Table of Contents



Results of Operations
 Three Months Ended January 31, 2007 Compared to Three Months Ended January 31, 2006
  Three Months Ended January 31,2007
    
    
    2006Dollars
    
    
    % Revenue
    
    
    Dollars
    
    
    % RevenueRetail electricity sales
    
    $
    50,711
    
    
    
    55
    %
    
    $
    44,352
    
    
    
    61
    %Natural gas sales
    
    
    41,834
    
    
    
    45
    %
    
    
    26,762
    
    
    
    37
    %Excess electricity sales
    
    
    99
    
    
    
    
    
    
    
    1,540
    
    
    
    2
    %Net revenue
    
    
    92,644
    
    
    
    100
    %
    
    
    72,654
    
    
    
    100
    %Direct energy costs
    
    
    78,112
    
    
    
    84
    %
    
    
    68,892
    
    
    
    95
    %Gross profit
    
    
    14,532
    
    
    
    16
    %
    
    
    3,762
    
    
    
    5
    %Selling and marketing expenses
    
    
    2,607
    
    
    
    3
    %
    
    
    1,228
    
    
    
    2
    %General and administrative expenses
    
    
    9,637
    
    
    
    10
    %
    
    
    6,847
    
    
    
    9
    %Income (loss) from operations
    
    $
    2,288
    
    
    
    3
    %
    
    $
    (4,313
    )
    
    
    (6
    )%
 13




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##### Table of Contents



Net revenue
  Three Months Ended January 31,2007
    
    
    2006Dollars
    
    
    % Revenue
    
    
    Dollars
    
    
    % RevenueRetail Electricity Sales:California
    
    $
    14,071
    
    
    
    15
    %
    
    $
    16,405
    
    
    
    23
    %Texas
    
    
    18,082
    
    
    
    19
    %
    
    
    3,766
    
    
    
    5
    %Pennsylvania/New Jersey
    
    
    10,762
    
    
    
    12
    %
    
    
    17,223
    
    
    
    24
    %Maryland
    
    
    5,362
    
    
    
    6
    %
    
    
    
    
    
    
    Michigan and Others
    
    
    2,434
    
    
    
    3
    %
    
    
    6,958
    
    
    
    9
    %Total Retail Electricity Sales
    
    
    50,711
    
    
    
    55
    %
    
    
    44,352
    
    
    
    61
    %Natural Gas Sales:California
    
    
    6,613
    
    
    
    7
    %
    
    
    8,568
    
    
    
    12
    %Ohio
    
    
    12,515
    
    
    
    13
    %
    
    
    11,312
    
    
    
    16
    %Georgia
    
    
    1,628
    
    
    
    2
    %
    
    
    3,943
    
    
    
    5
    %HESCO Customers
    
    
    20,169
    
    
    
    22
    %
    
    
    
    
    
    
    All Others
    
    
    909
    
    
    
    1
    %
    
    
    2,939
    
    
    
    4
    %Total Natural Gas Sales
    
    
    41,834
    
    
    
    45
    %
    
    
    26,762
    
    
    
    37
    %Excess Electricity Sales
    
    
    99
    
    
    
    
    
    
    
    1,540
    
    
    
    2
    %Net Revenue
    
    $
    92,644
    
    
    
    100
    %
    
    $
    72,654
    
    
    
    100
    %
     14




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##### Table of Contents



Gross Profit
  Direct Energy Costs
   Operating Expenses
  Income Taxes
  15




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##### Table of Contents



Six Months Ended January 31, 2007 Compared to Six Months Ended January 31, 2006
  Six Months Ended January 31,2007
    
    
    2006Dollars
    
    
    % Revenue
    
    
    Dollars
    
    
    % RevenueRetail electricity sales
    
    $
    104,118
    
    
    
    64
    %
    
    $
    94,442
    
    
    
    69
    %Natural gas sales
    
    
    57,499
    
    
    
    35
    %
    
    
    35,691
    
    
    
    26
    %Excess electricity sales
    
    
    1,535
    
    
    
    1
    %
    
    
    6,889
    
    
    
    5
    %Net revenue
    
    
    163,152
    
    
    
    100
    %
    
    
    137,022
    
    
    
    100
    %Direct energy costs
    
    
    138,563
    
    
    
    85
    %
    
    
    125,020
    
    
    
    91
    %Gross profit
    
    
    24,589
    
    
    
    15
    %
    
    
    12,002
    
    
    
    9
    %Selling and marketing expenses
    
    
    4,845
    
    
    
    3
    %
    
    
    1,926
    
    
    
    1
    %General and administrative expenses
    
    
    17,484
    
    
    
    11
    %
    
    
    14,456
    
    
    
    11
    %Income (loss) from operations
    
    $
    2,260
    
    
    
    1
    %
    
    $
    (4,380
    )
    
    
    (3
    %)
 Net revenue
  Six Months Ended January 31,2007
    
    
    2006Dollars
    
    
    % Revenue
    
    
    Dollars
    
    
    % RevenueRetail Electricity Sales:California
    
    $
    31,354
    
    
    
    19
    %
    
    $
    34,089
    
    
    
    25
    %Texas
    
    
    34,812
    
    
    
    21
    %
    
    
    9,962
    
    
    
    7
    %Pennsylvania/New Jersey
    
    
    24,976
    
    
    
    15
    %
    
    
    35,135
    
    
    
    26
    %Maryland
    
    
    6,852
    
    
    
    5
    %
    
    
    
    
    
    
    Michigan and Others
    
    
    6,124
    
    
    
    4
    %
    
    
    15,256
    
    
    
    11
    %Total Retail Electricity Sales
    
    
    104,118
    
    
    
    64
    %
    
    
    94,442
    
    
    
    69
    %Natural Gas Sales:California
    
    
    10,635
    
    
    
    7
    %
    
    
    12,994
    
    
    
    9
    %Ohio
    
    
    15,519
    
    
    
    10
    %
    
    
    13,934
    
    
    
    10
    %Georgia
    
    
    2,615
    
    
    
    2
    %
    
    
    5,107
    
    
    
    4
    %HESCO Customers
    
    
    27,425
    
    
    
    15
    %
    
    
    
    
    
    
    All Others
    
    
    1,305
    
    
    
    1
    %
    
    
    3,656
    
    
    
    3
    %Total Natural Gas Sales
    
    
    57,499
    
    
    
    35
    %
    
    
    35,691
    
    
    
    26
    %Excess Electricity Sales
    
    
    1,535
    
    
    
    1
    %
    
    
    6,889
    
    
    
    5
    %Net Revenue
    
    $
    163,152
    
    
    
    100
    %
    
    $
    137,022
    
    
    
    100
    %
   16




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##### Table of Contents



Gross Profit
  Direct Energy Costs
  Operating Expenses
  Income Taxes
  Liquidity and Capital Resources
 (Dollars in Thousands)January 31, 2007
    
    
    July 31, 2006Cash and cash equivalents
    
    $
    7,292
    
    
    $
    22,941Working capital
    
    
    36,070
    
    
    
    32,253Current ratio (current assets to current liabilities)
    
    
    2.1:1.0
    
    
    
    2.0:1.0Restricted cash
    
    
    10,595
    
    
    
    17,117Short term borrowings
    
    
    
    
    
    
    Letters of credit outstanding
    
    
    22,364
    
    
    
    17,600
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Credit Facility
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Consolidated Cash Flows
  Six Months EndedJanuary 31, 2007
    
    
    January 31, 2006Net cash provided by (used in):Operating activities
    
    $
    (16,405
    )
    
    $
    (14,109
    )Investing activities
    
    
    (5,783
    )
    
    
    (1,394
    )Financing activities
    
    
    6,539
    
    
    
    (4,461
    )Net decrease in cash and cash equivalents
    
    $
    (15,649
    )
    
    $
    (19,964
    )
    Contractual Obligations
  Critical Accounting Policies and Estimates
  
    
    Accounting for Derivative Instruments and Hedging Activities We purchase
substantially all of our power and natural gas under forward physical delivery contracts
for supply to our retail customers. These forward physical delivery contracts are defined
as commodity derivative contracts under Statement of Financial Accounting Standard, or SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. Using the
exemption available for qualifying contracts under SFAS No. 133, we apply the normal
purchase and normal sale accounting treatment to a majority of our forward physical
delivery contracts. Accordingly, we record revenue generated from customer sales as energy
is delivered to our retail
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##### Table of Contents



customers and the related energy cost under our forward physical delivery contracts is
recorded as direct energy costs when received from our suppliers. We use financial derivative
instruments (such as swaps, options and futures) as an effective way of assisting in managing
our price risk in energy supply procurement. For forward or future contracts that do not meet
the qualifying criteria for normal purchase, normal sale accounting treatment, we elect cash
flow hedge accounting, where appropriate.We also utilize other financial derivatives, primarily swaps, options and futures to hedge
our commodity price risks. Certain derivative instruments, which are designated as economic
hedges or as speculative, do not qualify for hedge accounting treatment and require current
period mark to market accounting in accordance with SFAS No. 133, with fair market value
being used to determine the related income or expense that is recorded each quarter in the
statement of operations. As a result, the changes in fair value of derivatives that do not
meet the requirements of normal purchase and normal sale accounting treatment or cash flow
hedge accounting are recorded in operating income (loss) and as a current or long-term
derivative asset or liability. To the extent that the hedges are not effective, for
transactions qualifying as hedges, any ineffective portion of the changes in fair market
value is recorded currently in direct energy costs. The subsequent changes in the fair value
of these contracts could result in operating income (loss) volatility as the fair value of
the changes are recorded on a net basis in direct energy costs in our consolidated statement
of operations for each period.As a result of a sale on January 28, 2005 of two significant electricity forward physical
delivery contracts (on a net cash settlement basis) back to the original supplier, the normal
purchase and normal sale exemption under SFAS No. 133 was no longer available for our
Pennsylvania market (PJM-ISO). Accordingly, for the period from February 2005 through July
2006, we designated forward physical delivery contracts entered into for our Pennsylvania
electricity market (PJM-ISO) as cash flow hedges, whereby market to market accounting gains
or losses were deferred and reported as a component of Other Comprehensive Income (Loss)
until the time of physical delivery. Effective August 1, 2006, the normal purchase and normal
sale exemption has been reinstated for the PJM-ISO market.
    
    Utility and independent system operator Included in direct energy costs, along with
the cost of energy that we purchase, are scheduling costs, Independent System Operator, or
ISO, fees, interstate pipeline costs and utility service charges. The actual charges and
certain energy costs are not finalized until subsequent settlement processes are performed
for all distribution system participants. Prior to the completion of settlements (which may
take from one to several months), we estimate these costs based on historical trends and
preliminary settlement information. The historical trends and preliminary information may
differ from actual information resulting in the need to adjust previous estimates.
    
    Allowance for doubtful accounts We maintain allowances for doubtful accounts for
estimated losses resulting from non-payment of customer billings. If the financial
conditions of certain of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
    
    Net revenue and unbilled receivables Our customers are billed monthly at various
dates throughout the month. Unbilled receivables represent the estimated sale amount for
power delivered to a customer at the end of a reporting period, but not yet billed.
Unbilled receivables from sales are estimated based upon the amount of power delivered, but
not yet billed, multiplied by the estimated sales price per unit.
    
    Inventory Inventory consists of natural gas in storage as required by state
regulators and contracted obligations under customer choice programs. Inventory is stated
at the lower of cost or market.
    
    Customer Acquisition Cost The Company pays an upfront fee to certain third-party
vendors upon the successful acquisition of new customer contracts. These customer
acquisition costs related to specific new customers contracts acquired are deferred and
amortized over the life of the initial customer contract, typically one year.
    
    Legal matters From time to time, we may be involved in litigation matters. We
regularly evaluate our exposure to threatened or pending litigation and other business
contingencies and accrue for estimated losses on such matters in accordance with SFAS No.
5, Accounting for Contingencies. As additional information about current or future
litigation or other contingencies becomes available, management will assess whether such
information warrants the recording of additional expense relating to our contingencies.
Such additional expense could potentially have a material adverse impact on our results of
operations and financial position.
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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk.
   
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  21




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  Arbitration Proceeding with American Communications Network.
 APX Settlement
  
 Item 1A. Risk Factors.
  We may need additional capital in the future and it may not be available on acceptable terms,
or not at all.
  We may issue additional shares of common stock that may dilute the value of our common stock
and adversely affect the market price of our common stock.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 .
 
 Item 3. Defaults Upon Senior Securities.
 .
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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders.
  Proposal 1
  Nominee
    
    Votes For
    
    
    Votes WithheldDennis R. Leibel
    
    
    18,496,596
    
    
    
    487,995Robert C. Perkins
    
    
    17,366,809
    
    
    
    1,617,782
 Proposal 2
 For
    
    Against
    
    Abstain
    
    Broker Non-Votes18,751,388
    
    
    72,747
    
    
    
    160,456
    
    
    
    0
 
 Item 5. Other Information.
 APX Proceeding Settlement
    23




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##### Table of Contents



Third Amendment to Loan and Security Agreement and Waiver
   24




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##### Table of Contents



Item 6. Exhibits.
  ExhibitNumber
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of Commerce Energy Group, Inc., previously filed with the SEC on
July 6, 2004 as Exhibit 3.3 to Commerce Energy Group, Inc.s Registration Statement on Form 8-A and incorporated
herein by reference.3.2
    
    Certificate of Designation of Series A Junior Participating Preferred Stock of Commerce Energy Group, Inc. dated
July 1, 2004 previously filed with the SEC on July 6, 2004 as Exhibit 3.4 to Commerce Energy Group, Inc.s
Registration Statement on Form 8-A and incorporated herein by reference.3.3
    
    Amended and Restated Bylaws of Commerce Energy Group, Inc., previously filed with the SEC on July 6, 2004 as
Exhibit 3.6 to Commerce Energy Group, Inc.s Registration Statement on Form 8-A and incorporated herein by
reference.4.1
    
    Rights Agreement, dated as of July 1, 2004, entered into between Commerce Energy Group, Inc. and Computershare
Trust Company, as rights agent, previously filed with the Commission on July 6, 2004 as Exhibit 10.1 to Commerce
Energy Group, Inc.s Registration Statement on Form 8-A and incorporated herein by reference.4.2
    
    Form of Rights Certificate, previously filed with the Commission on July 6, 2004 as Exhibit 10.2 to Commerce
Energy Group. Inc.s Registration Statement on Form 8-A and incorporated herein by reference.10.1
    
    Amendment No. 1 to Employment Agreement dated November 30, 2006 by and between Commerce Energy Group, Inc. and
Lawrence Clayton, Jr.10.2
    
    APX Settlement and Release of Claims Agreement dated as of January 5, 2007 by and among the Settling Parties,
including Commonwealth Energy Corporation (n/k/a Commerce Energy, Inc.).10.3
    
    Commerce Energy Group, Inc. Bonus Program, effective January 25, 2007, previously filed with the SEC on January
31, 2007 as Exhibit 99.1 to Commerce Energy Group, Inc.s Current Report on Form 8-K and incorporated by reference
herein.10.4
    
    Amendment No. 1 to Employment Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc. and
Steven S. Boss, previously filed with the SEC on January 31, 2007 as Exhibit 99.2 to Commerce Energy Group, Inc.s
Current Report on Form 8-K and incorporated by reference herein.10.5
    
    Amendment No. 1 to Restricted Stock Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc.
and Steven S. Boss, previously filed with the SEC on January 31, 2007 as Exhibit 99.3 to Commerce Energy Group,
Inc.s Current Report on Form 8-K and incorporated by reference herein.10.6
    
    Amendment No. 2 to Employment Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc. and
Lawrence Clayton, Jr., previously filed with the SEC on January 31, 207 as Exhibit 99.4 to Commerce Energy Group,
Inc.s Current Report on form 8-K and incorporated by reference herein.10.7
    
    Amendment No. 1 to Restricted Stock Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc.
and Lawrence Clayton, Jr., previously filed with the SEC on January 31, 2007 as Exhibit 99.5 to Commerce energy
Group, Inc.s Current Report on Form 8-K and incorporated by reference herein.10.8
    
    Amended and Restated Non-Employee Director Compensation Policy, Effective January 25, 2007, previously filed with
the SEC on January 31, 2007 as Exhibit 99.6 to Commerce Energy Group, Inc.s Current Report on Form 8-K and
incorporated by reference herein.10.9
    
    Third Amendment to Loan and
Security Agreement dated March 15, 2007 among Commerce Energy,
Inc., Commerce Energy Group, Inc., Wachovia Capital
Finance Corporation (Western) and The CIT Group/Business Credit, Inc.31.1
    
    Principal Executive Officer Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
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##### Table of Contents



ExhibitNumber
    
    Description31.2
    
    Principal Financial Officer Certification required by Rule 13a-14(a) of the Securities Exchange Act of Act of 1934.32.1
    
    Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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##### Table of Contents



SIGNATURES
  COMMERCE ENERGY GROUP, INC.Date: March 19, 2007
    By:
    /s/ STEVEN S. BOSSSteven S. BossChief Executive Officer
(Principal Executive Officer) Date: March 19, 2007
    By:
    /s/ LAWRENCE CLAYTON, JR.Lawrence Clayton, Jr.Senior Vice President and Chief Financial Officer
(Principal Financial Officer) 27




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of Commerce Energy Group, Inc., previously filed with the SEC on
July 6, 2004 as Exhibit 3.3 to Commerce Energy Group, Inc.s Registration Statement on Form 8-A and incorporated
herein by reference.3.2
    
    Certificate of Designation of Series A Junior Participating Preferred Stock of Commerce Energy Group, Inc. dated
July 1, 2004 previously filed with the SEC on July 6, 2004 as Exhibit 3.4 to Commerce Energy Group, Inc.s
Registration Statement on Form 8-A and incorporated herein by reference.3.3
    
    Amended and Restated Bylaws of Commerce Energy Group, Inc., previously filed with the SEC on July 6, 2004 as
Exhibit 3.6 to Commerce Energy Group, Inc.s Registration Statement on Form 8-A and incorporated herein by
reference.4.1
    
    Rights Agreement, dated as of July 1, 2004, entered into between Commerce Energy Group, Inc. and Computershare
Trust Company, as rights agent, previously filed with the Commission on July 6, 2004 as Exhibit 10.1 to Commerce
Energy Group, Inc.s Registration Statement on Form 8-A and incorporated herein by reference.4.2
    
    Form of Rights Certificate, previously filed with the Commission on July 6, 2004 as Exhibit 10.2 to Commerce
Energy Group. Inc.s Registration Statement on Form 8-A and incorporated herein by reference.10.1
    
    Amendment No. 1 to Employment Agreement dated November 30, 2006, by and between Commerce Energy Group, Inc. and
Lawrence Clayton, Jr.10.2
    
    APX Settlement and Release of Claims Agreement dated as of January 5, 2007 by and among the Settling Parties,
including Commonwealth Energy Corporation (n/k/a Commerce Energy, Inc.).10.3
    
    Commerce Energy Group, Inc. Bonus Program, effective January 25, 2007, previously filed with the SEC on January
31, 2007 as Exhibit 99.1 to Commerce Energy Group, Inc.s Current Report on Form 8-K and incorporated by
reference herein.10.4
    
    Amendment No. 1 to Employment Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc. and
Steven S. Boss, previously filed with the SEC on January 31, 2007 as Exhibit 99.2 to Commerce Energy Group, Inc.s
Current Report on Form 8-K and incorporated by reference herein.10.5
    
    Amendment No. 1 to Restricted Stock Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc.
and Steven S. Boss, previously filed with the SEC on January 31, 2007 as Exhibit 99.3 to Commerce Energy Group,
Inc.s Current Report on Form 8-K and incorporated by reference herein.10.6
    
    Amendment No. 2 to Employment Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc. and
Lawrence Clayton, Jr., previously filed with the SEC on January 31, 207 as Exhibit 99.4 to Commerce Energy Group,
Inc.s Current Report on form 8-K and incorporated by reference herein.10.7
    
    Amendment No. 1 to Restricted Stock Agreement dated January 25, 2007, by and between Commerce Energy Group, Inc.
and Lawrence Clayton, Jr., previously filed with the SEC on January 31, 2007 as Exhibit 99.5 to Commerce energy
Group, Inc.s Current Report on Form 8-K and incorporated by reference herein.10.8
    
    Amended and Restated Non-Employee Director Compensation Policy, Effective January 25, 2007, previously filed with
the SEC on January 31, 2007 as Exhibit 99.6 to Commerce Energy Group, Inc.s Current Report on Form 8-K and
incorporated by reference herein.10.9
    
    Third Amendment to Loan and
Security Agreement dated March 15, 2007 among Commerce Energy,
Inc., Commerce Energy Group, Inc., Wachovia Capital
Finance Corporation (Western) and The CIT Group/Business Credit, Inc.31.1
    
    Principal Executive Officer Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
 28




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##### Table of Contents



ExhibitNumber
    
    Description31.2
    
    Principal Financial Officer Certification required by Rule 13a-14(a) of the Securities Exchange Act of Act of 1934.32.1
    
    Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 29